By Mike Dolan
LONDON (Reuters) – After a wild Monday, equity trading appears to have calmed somewhat even as the U.S.-inspired trade war ratchets up. Speculation about a devaluation of China’s yuan has moved center stage along with a snapback in U.S. Treasury yields.
Today’s Market Minute
* China refused to bow to what it called “blackmail” from the United States as a global trade war ignited by President Donald Trump’s sweeping tariffs showed little sign of abating on Tuesday.
* The U.S. dollar fell on Tuesday while the euro rallied as stocks rebounded in Asia and Europe on hopes that U.S. will enter negotiations over his sweeping tariffs that have roiled markets for three days.
* The European Commission said on Monday it had offered a “zero-for-zero” tariff deal to avert a trade war with the U.S. as EU ministers agreed to prioritize negotiations, while striking back with 25% tariffs on some U.S. imports.
* Gold’s latest gallop to all-time highs has drawn comparisons with the last time political and economic turmoil were the main drivers of record prices, back in 1980. But market players say the nature of this rally – and potentially its ability to endure – look different.
* The United States is starting to resemble an emerging market more than a developed country, the head of pan-European stock exchange operator Euronext said on Tuesday.
Stocks take a breath, but yuan, Treasuries convulse
Highlighting just how fragile market sentiment currently is, Monday’s 5-7% intraday swings in Wall Street’s stock indexes were largely driven by a rogue news headline about a pause in tariffs that was quickly denied. This also reflected how much speculative short selling appears to have built up over the past week, exaggerating the withering downswing.
In the end, the S&P 500 closed only marginally lower on the day, though it’s still off more than 10% since last Wednesday’s tariff announcement.
Gasping for breath after a torrid week, stock futures and world bourses all staged a modest bounce on Tuesday, with Japan’s Nikkei emitting the biggest sigh of relief with a 6% rally.
Tokyo outperformed after President Donald Trump said Japan was sending a trade negotiating team to America and U.S. Treasury Secretary Scott Bessent said he expects Japan to get “priority” treatment. Japan’s Prime Minister Shigeru Ishiba said separately he told Trump to rethink tariff policies.
Meanwhile, China refused to back down on its retaliatory tariffs, prompting Trump to threaten raising U.S. import levies on Chinese goods to more than 100%.
On Tuesday, China’s commerce ministry said it would not bow to U.S. “blackmailing” and that “China will fight to the end.”
As if to up the ante, China’s yuan fell to its weakest level since 2023 on Tuesday after the central bank slightly loosened its grip on the currency in what appeared to be an attempt to counteract the tariff blow to exports.
During Trump’s first trade war with China, Beijing effectively devalued the yuan by about 10%, offsetting much of the tariff hit on Chinese exporters.
If it were to replicate a similar move in the current standoff, it would undermine one of the stated aims of the Trump campaign: pushing down on what they see as an overvalued dollar.
Japan’s former top currency diplomat Naoyuki Shinohara said on Tuesday that any U.S. attempt to pull off a 1985 Plaza Accord-style coordinated depreciation of the dollar won’t work as it would require the consent of China and Europe.
The dollar is starting to creep higher across the board. And, with the help of official buying, Chinese stocks rallied too.
This all raises the question of whether China’s huge holdings of U.S. debt could become a weapon in the escalating game of chicken between Beijing and Washington.
Turning to that market, Treasuries – facing a heavy week of new debt sales this week – recoiled violently on Monday, with 10-year yields retracing all their decline since Wednesday’s tariff statement.
Whether that was due to hawkish Federal Reserve soundings or China selling concerns is unclear. The big move also exacerbated long-standing anxieties about hedge fund exposure to the so-called ‘basis trade’ in Treasuries – essentially an arbitrage between cash and futures positions – that is worth hundreds of billions of dollars.
The problem is that this trade relies on relatively low volatility and the past week certainly didn’t have that, with the MOVE index of Treasury volatility hitting its highest since October 2023.
All this makes the war of words between Trump and Fed boss Jerome Powell all the more important, which I discuss in my column today.
Chart of the day
Investors are watching the U.S. credit market like a hawk, fearful that high volatility in ‘junk’ bond pricing could cause financing to tighten up broadly. High-yield corporate debt spreads have risen to near two-year highs at 461 basis points. True, that is still shy of the alarm zone above 500 bps, but the asset class’s volatility gauge has zoomed to its highest since 2022, when the Fed was rapidly hiking borrowing costs. So the big question now is whether this soaring volatility – which is nearing pandemic levels – could effectively shut down the entire market.
Today’s events to watch
* U.S. March NFIB small business survey
* San Francisco Federal Reserve President Mary Daly speaks; European Central Bank board member Piero Cipollone speaks; Bank of England Deputy Governor Clare Lombardelli speaks
* U.S. corporate earnings: Walgreens Boots Alliance
* US Treasury sells $58 billion of 3-year notes
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.
(By Mike Dolan; Editing by Anna Szymanski)
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