D dayfor tariffs send markets into a tail spin again

After Wednesday’s dead cat bounce for stocks, It is sell the rumour, and sell the fact for European financial markets on Wednesday as risky assets and safe havens alike sell off on the back of President Trump’s punitive tariffs coming into effect today.

European stock markets have opened broadly lower on Wednesday, after Donald Trump’s reciprocal tariffs came into effect. Stocks and bonds are selling off, with particularly brutal selling taking place in the long end of the curve. The sell off so far on Tuesday includes:

• A 2% drop in the FTSE 100 and the Eurorstoxx 50 index.

• Losses for all European major bond markets.

• The 10-year US Treasury yield is up by 7bps on Wednesday morning, and the UK 10-year Gilt yield is up by 6bps.

• 2-year yields are dropping sharply in the UK, as the interest rate futures market rushes to price in emergency-style rate cuts from the Bank of England.

• The UK overnight swaps market is now pricing in more than 3 rate cuts from the BOE for this year.

• The prospect of steep rate cuts is not helping UK stocks, all sectors on the FTSE 100 are lower, led by energy and materials. Pharma is also selling off, possibly on the back of extra tariffs that could come down the line targeting this sector.

• 30-year UK Gilt yields have surged by 16bps today, and yields are at their highest level since 1998. This is unsustainable for the UK, so watch out for official statements, either from government or from the Bank of England to try and assuage the bond market.

• The chance of an intra-meeting cut from the BOE is surging, there is a 111% chance of a rate cut priced in for May, with 27bps of cuts currently priced in. There was an 80% chance of a cut priced in before Trump’s tariff announcement, which highlights just how big an impact tariffs are having on the future path for monetary policy.

• There have been a wave of central bank rate cuts today: New Zealand and India have cut rates today, and others could follow.

• Governments are also springing to action, Japan’s government is holding an emergency meeting, this comes after positive noises from Trump about discussions with Japan. However, all the diplomacy in the world has not been enough to ward off the impact from tariffs.

• Asian stocks also dropped on Wednesday, although the sell off in Chinese equities has been scaled back after reports from Beijing that Chinese authorities will use dialogue to resolve trade disputes with the US, after the US slapped 104% tariffs on all Chinese imports.

• Energy prices are slumping, as commodity traders’ price in the prospect of weaker economic growth on the back of tariffs. The Brent crude oil price is just above $61 per barrel on Wednesday, after falling another 2.3% today. Commodities that are exposed to economic growth are dropping sharply, while the gold price is surging.

• Gold is the most reliable haven on Wednesday, and is higher by $60, erasing recent weakness. The gold price is once again above $3,000 per ounce, which is a sign that any dips in gold is being eagerly sought out by buyers, which is not the case for stocks and other risky asset classes.

• The dollar is broadly lower, as tariffs remain a source of concern for dollar bulls.

So, where do stocks  go now? Just when you think that the tariff news has been priced in by financial markets, risk assets take another swoon lower. This is a sign that the US’s new trade policy is 1, a complete game changer for the global economy, and 2, too complex and chaotic for traders to price into markets in only a couple of days.

Typically, volatility does not stay above 50 for long, it has only done so once before in the last 30 years, when Covid struck. The Vix is turning lower on Wednesday, which could be a sign that asset prices could be erratic on Wednesday.

Due to the impact tariffs are having on financial markets, the tone will likely be set by 1, official central bank action to mitigate the effects of tariffs, or 2, comments from the White House later today.

Why Trump’s ‘art of the deal’ is toxic for markets

On Tuesday, Treasury Secretary Bessant, tried to move the narrative around tariffs away from the idea that they will be permeant at the current level, and instead talked about the prospect for negotiation. President Trump’s dwindling number of Wall Street supporters have been saying that he is using his skills from the art of the deal when trying to shift the US’s trade deficit. That might work if you run a real estate business, however, when it comes to running a country, it helps to be upfront and diplomatic from the start.

The sell off in Treasuries alongside stocks on Wednesday could worry the President. It is well known that he judges his performance by the 10-year yield, which has surged back above 4% and risen by more than 23bps this week. The US CPI reading that is due for release on Thursday, could exacerbate this sell off in Treasuries.

The focus today is once more on tariff policy and whether the President will pause or agree deals with trading partners to moderate tariff levels. The trade wars have begun.