Less than 24 hours after US president Donald Trump backtracked on his once-in-a-century trade war to prevent a meltdown in financial markets, frantic sell-offs hit US stocks, bonds and the dollar yet again as fears of a worldwide recession engulfed Wall Street.
The S&P 500 Index ended the day down 3.5 per cent as investors seized on Wednesday’s historic rebound to sell. A rout in long-term Treasuries sent yields soaring after a brief respite. The dollar tumbled for a third day as traders liquidated US assets in favour of haven currencies like the Swiss franc, which surged by the most in a decade. Meanwhile, oil prices fell further.
In a measure of how volatile markets have been since Mr Trump announced his plan to impose punitive tariffs on dozens of America’s trading partners, the S&P 500’s gyrations in the past two trading have rivalled those unleashed by the pandemic and the 2008 financial crisis.
The moves, in the end, all pointed toward the same sobering conclusion: Mr Trump’s chaotic tariff roll-outs – regardless of where they eventually settle – is rapidly undermining confidence in the US economy and threatening to keep markets on edge for the next three months as traders wait to see how it will all play out.
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“The reality of this being over quick and us returning to happy days quickly is very, very low,” said Bill Smead, chief investment officer at Smead Capital Management. “This is the beginning of a monstrous bear market.”
That fear is indicative of how much sentiment has shifted less than three months into Mr Trump’s second term, one that Wall Street once wagered would fuel the stock market’s bull run by slashing taxes, rolling back regulation and driving the economy’s growth.
But those expectations have rapidly reversed as Mr Trump moved to fire tens of thousands of employees, withheld federal aid and moved to single-handedly rewrite the rules of global trade in America’s favour.
As much as the tariffs themselves, concerns have deepened because of the president’s approach – including on-and-off again roll-outs, unusual formulas used to set them, an unorthodox objective, and his decision to keep escalating the conflict with China, which instead of being exempted from Wednesday’s reprieve was hit with another round of retaliation.
That’s made it difficult for Wall Street analysts to forecast how it will all play out, much less reckon what it will ultimately mean for the prices of stocks, bonds and commodities.
In the US, the sell-off sowed speculation that the Federal Reserve would need to step in and stabilise the market as yields kept marching higher, threatening to deal the economy another jolt by pushing up the cost of borrowing across the financial system.
When stock markets reopened on Thursday, prices swooned sending the S&P 500 down more than 6 per cent before it recovered part of the decline. The VIX – known as Wall Street’s “fear gauge” – fell by the most ever as stocks soared after Trump announced a 90-day pause on some tariffs. On Thursday, it has popped back above 40, a sign of increasing jitters in the market.
In the Treasuries market, long-dated debt tumbled again, even after the results new bond auctions over the last two days eased concerns about demand. But other worries have continued to drag on the market, including the risk of rising inflation, a pullback by overseas buyers, or a swelling US deficit if growth stalls. – Bloomberg
