Trump’s 90-day tariffs pause triggers major equity rally
Read all market updates from Rob Hogg here.
What’s happened overnight?
Overnight US President Trump authorised a 90-day pause in the imposition of reciprocal tariffs on some/most US trading partners.
This announcement led to a historic bounce in equity markets – the S&P 500 index rallied 9.5%, it’s third largest one-day rally since 1990 (the two larger rallies being in the GFC period of 2008)
However, Trump also raised tariffs on China to 125% but then tweeted later in the US day that a deal will be made with China.
It seems likely that huge gyrations in US equity markets, but more particularly the US bond market, may have brought about this policy wind-back – during our (Australian) afternoon yesterday (the US overnight session), the US 30-year bond sold-off sharply with its yield rising from 4.765% to more than 5% at one stage, with bond market volatility reaching its highest level since September 2023.
This level of volatility in the bond market – the market where the global risk-free rate is set – was probably the key factor causing the policy back-down. Importantly, this episode demonstrates that there do seem to be some financial market “guardrails” around what the US Administration can do.
Where to from here?
We are likely to witness relief rallies across a range of markets in the short term – equities, commodities and commodity-linked currencies like the Australian dollar, and credit. But President’s Trump’s actions and unpredictability mean that markets cannot move fully back to where they were prior to “Liberation Day” – investors will demand a higher “risk-premium” to invest in risky assets such as shares for the foreseeable future, something we already witness in market pricing.
The risk of a US recession, which had reached a high level of probability a day ago, has likely declined following the latest announcement, but the risk of recession is still higher than it was prior to Liberation Day – company investment and employment decisions, and household spending decisions, depend on stability of expectations, and this stability has been negatively impacted by the recent policy volatility
As we noted earlier this week, the current volatile market conditions reflect high levels of uncertainty around what actions Governments and central banks may take to offset a very uncertain tariff outlook, and its impact on growth, inflation and company earnings. Ultimately this will determine the level at which equities trade and the direction for interest rate policy.
Our response continues to be to act with caution with a view to retaining a focus on capital preservation for the long term. With continued extreme levels of uncertainty, the risk of getting whipsawed is very high. Our prior caution was based on both the level of market valuations and extreme concentration risk in both US and Australian equity markets. This led to an underweight exposure to growth in general and an overweight to income assets where appropriate and this continues to represent our best thoughts on the current market.
Our thinking is that Australia could well be a relative beneficiary of the trade wars with the direct tariff impact on Australia among the lowest of any country. Additionally, with inflation trending lower, the Reserve Bank has scope to respond flexibly with a rapid program of rate cuts should they be required. While our key trading partner China has been targeted with very significant tariffs (which will be the subject of negotiation), it is expected that Chinese policy makers will respond with growth supportive measures to ameliorate some of the expected tariff impact. Australian commodity exports are well placed to benefit from any good news here.
As we noted on Friday, and witnessed last night, these unilaterally imposed US policy changes can be wound back. Trump is a pragmatist at heart and will be keenly aware that he has just lost US households a significant amount of their personal wealth. He will also probably have an eye on the mid-term elections next year. For these reasons, we expect the US to enter a greater range of bilateral tariff arrangements with individual countries which are likely to be struck at lower tariff levels than have been initially proposed by Trump.
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