US stocks fade, as Shell leads the UK higher, and tariffs continue to dominate

The risk rally is fading as we move into Tuesday, after a stunning rally for US stocks at the start of the week. The markets are reacting to news flow as we lead up to the April 2nd deadline for US reciprocal tariffs. At the start of this week investors had taken comfort from the fact that the next round of tariffs would be targeted and less broad based than feared. However, sentiment is fading as a lack of clarity on what to expect next week and the prospect of secondary tariffs  for countries that buy oil from Venezuela add another dimension to President Trump’s trade wars.

Shell sweetens up investors

European stocks have opened slightly higher, as we wait for further details about tariffs. The energy sector and autos are leading European stocks higher. Shell is a top performer so far on Tuesday, after it announced that it would raise shareholder distributions to 40-50% of cash flow, up from 30-40% initially. The company is also committing to a 4% per year dividend policy and it will prioritize share buybacks. The company also said that it would expand its LNG sales until 2030, which has been a key driver of profitability at the company in recent years.

Shell pulls further away from BP

Shell is one of the top performers on the FTSE 100 so far today, and its share price is higher by more than 1%.  The contrast between BP and Shell could not be more stark right now. As BP pulls back on shareholder returns, Shell is super charging there’s. This is likely to widen the performance gap between Shell and BP even more, and BP’s share price is dropping on Tuesday.

The shifting narrative for the US economy

US stock markets had their best start to a Monday since 2022, which was fueled by hopes that Trump’s tariff announcement on April 2nd would be less onerous than expected. The S&P 500 had its third best session of the year, and the consumer discretionary sector had its best day in three years. US bond yields rose sharply, which suggests that the market is recalibrating the US economy’s recession risk. Although US stock index futures are mildly lower on Tuesday, there are some interesting questions that investors are starting to ask. Could the narrative shift from US recession fears to signs of US economic resilience in the era of President Trump’s tariffs?

China and Hong Kong hit by concerns about financing costs and worries about a tech bubble

Interestingly, European, Chinese and Hong Kong stocks did not join in the rally on Monday, and stocks in Hong Kong fell sharpy overnight. This could be a sign that investors are reassessing their regional allocations ahead of Q2. It may also reflect higher financing costs in China, which spooked investors. There was also some concern from Alibaba, which warned that a bubble could be forming in data Centre construction in Asia, which fueled a selloff in the China’s tech sector. The Hang Seng has declined for three of the last four sessions even though there were some strong earnings data from the likes of Tencent and BYD. European and Asian shares pulled away from US shares on the way up, will they now lag US shares if they stage a comeback?

What is next for the bond market

The bond market is in focus at the start of the week, after a selloff in  US treasuries on Monday. The US yield curve steepener trade has stalled, as short-dated bonds have risen at the same time as long dated bonds. A strong US service sector PMI has caused a sell-off in the short end of the Treasury curve in the US, and 10 bps have been shaved off rate cut expectations in the US for this year.

The other bond market in focus is the UK. The  UK Chancellor will deliver her spring statement on Wednesday, ahead of UK CPI that is scheduled for release tomorrow morning. UK bonds have moved in line with US yields in the past week. The 2-year yield is higher by 6 basis points and the 10-year yield is up by nearly 7 bps in the past week. Part of the sell off is the outperformance of UK and US service sector PMIs for March, and the stronger growth outlook for the US and the UK compared to Europe. However, if the OBR dramatically revises down its expectations for UK growth in tomorrow’s spring statement, watch for any reaction in the UK bond market. If the UK bond market starts to sell off at a faster pace than the US, then this could signal that bond vigilantes are once again looking at the UK economy, especially after a spate of weak public finance data.