The US and China are on collision course

Markets

(Interest rate) markets yesterday faced extreme intraday volatility. Swings in US Treasury yields amounted from more than 43 bps for the 2‐y to ‘only’ 33 bps at the very long end of the curve (30‐y). German yields whipsawed about 25 bps across the curve intraday. UK gilt yields saw similar swings, even slightly more at the very long end (30‐ y 28 bps move). In the end, US yields in a bear steepening move finished the day between 11 (2‐y) and 21 (30‐y) bps higher. The German curve also steepened with yields in a daily perspective changed between ‐5.0 bps (2‐y) and + 3.7 bps (30‐y). In this high‐volatility environment, Bunds again outperformed swaps. Intra‐EMU spreads also again widened, albeit modestly (Italy 10‐y +6 bps). Anyway, the moves occurred as there was little in the way of ‘hard’ political or economic news. At least there was no clear reason/guide for market to get a more crystallized view on what to expected from reaction function of the Fed (or other central bankers) going forward. For now, Fed members (Goolsbee, Kugler) in the first place warned on the inflationary impact of tariffs. However, longer term visibility for the Fed probably is as low as it is for markets. It remains impossible for investors to make any educated guess on what to expect from the US/Trump Tariff policy or a fortiori on the longer term impact for growth and/or inflation inside and outside the US. The US and China are on collision course as president Trump vowed to add another tarifflayer of 50% in reaction to China matching the 34% reciprocal levy on Chinese imports into the US (cf infra). For some other countries, the US is signaling preparedness to negotiate (Japan, Isreal). Even so, it is remains vague what the Trump administration exactly wants to scale back tariffs, if they have the intention to do so anyway. The EU at the same time advocates a ‘carrot‐and‐stick’ approach, advocating negotiations, but at the same time preparing countermeasures if they fail. At least for now, you don’t have the impression that it will be easy to find a workable and sustainable compromise anytime soon. In this respect, elevated market volatility probably is here to stay for some time to come. US equities yesterday closed a volatile session a ‘little changed’ (‐0.23%). However, this probably is more an indication of agnosticism rather than suggesting a genuine bottoming out process. The Eurostoxx still closed 4.55% lower. FX markets, at for the major FX cross rates also took a more agnostic view. The DXY TW USD index gains modestly (103.25 from 103.5) admittedly also amid intraday swings. USD/JPY gained from about 147 tot 147.8. EUR/USD eased to close at 1.091. Smaller, less liquid currencies mostly declined substantially. In this respect, we mention sterling underperformance. EUR/GBP jumped sharply (close 0.857) and this occurred amid strong underperformance of the very long and of the UK yield curve (30‐y+ 20.5 bps!)

Asian equities this morning mostly show modest gains, with Japan outperforming (Nikkei +5.75%). US and European futures also suggest a positive open. Even so, gains are very limited compared to recent losses. The eco calendar is again very thin. So, headlines/rumours on trade/tariff issues will continue to drive price swings. For now, the steepening trend on yield markets, including the US, might continue. This in theory might cap further USD gains.

News and views

Chinese monetary authorities during this morning’s daily fixing let the Chinese currency weaken beyond the closely watched USD/CNY 7.20 barrier. The 7.2038 fixing level was the weakest for the yuan since September 2023 and triggered instant depreciation within the allowed 2% deviation margin at the open. USD/CNY gapped higher to 7.337 before paring the gains slightly to 7.33 currently. The move by the central bank suggests China is willing to use its currency as a shock absorber in the escalating trade war with the US. Just yesterday, president Trump threatened to impose an additional 50% import taxes on China in a response to the latter’s retaliatory tit‐for‐tat 34% tariff announcement last Friday. Any further CNY depreciation will likely be (managed to be) gradual though since authorities are wary for potential capital outflows and wider financial instability.

The European Commission is proposing counter‐tariffs as high as 25% on a range of US goods in retaliation to the US levies on aluminum and steel, Reuters reported yesterday. The document seen by the news agency made no mention of bourbon, which the EC had earmarked for a 50% tariff. That prompted a backlash by Trump, who threatened a 200% response to EU alcoholic drinks if the EC would push it through. The European levies go into force April 15. Deliberations on how to react to the US across‐the‐board 20% tariff announced last week are ongoing.

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