Caught in the fog of indecision

Overview

US markets are caught in a fog of indecision, drifting as investors digest Powell’s testimony while bracing for Trump’s latest tariff maneuver. The prevailing mood is cautious—waiting for Trump to pull back the curtain on his grand "reciprocal tariff" strategy, where he’s vowed that any country imposing tariffs on the US will be met with equal force.

The executive order slapping a 25% tariff on all steel and aluminum imports starting March 12 has been signed, but the real question is whether this is just another high-stakes bargaining chip or the first salvo in a prolonged trade war. With markets hanging in limbo, traders are hedging their bets, knowing full well that the next move could either spark a global standoff or fizzle out in yet another round of last-minute negotiations.

China’s retaliatory tariffs against the US went live on Monday; if you forgot, to worry, the market barely flinched—because, let’s be honest, Beijing’s move was more theatre than teeth. It was a carefully calibrated warning shot, signalling defiance without triggering a full-blown escalation. But now, the real drama unfolds as Trump lays down his latest trade gauntlet, and this time, he isn’t mincing words.

From the Oval Office, Trump delivered his most aggressive trade salvo yet: a blanket 25% tariff on all steel and aluminum imports, no carve-outs, no exceptions. “Protecting steel and aluminum is a must,” he declared. “I’m simplifying our tariffs so everyone understands what it means. It’s 25% across the board—no matter where it comes from.” And just when markets thought they’d seen it all, he doubled down with a stark warning: any country that slaps tariffs on US goods will be met with an equal and opposite reaction, percentage for percentage, hit for hit.

The tariffs won’t take effect until March 12. Perhaps the initial announcement was not the big market-moving event some would have thought, but the psychological impact does resonate. Traders are now forced to reckon with the tail risk that this might not be just a bargaining chip—it’s a high-stakes gamble that could reshape global steel trade flows. The key question: should markets treat this as yet another round of Trumpian brinkmanship, or is the hammer actually about to drop?

Xi Jinping, for his part, is playing the long game. China’s fragile economic recovery can’t afford a drawn-out trade war, and the recent rally in Chinese equities suggests Beijing’s diplomatic finesse is keeping investor sentiment buoyant. Trump’s initial 10% tariffs on China have already been in effect for a week, but markets haven’t blinked. Even Beijing’s $14 billion countermeasure—and the looming risk of a second punch from Washington—hasn’t derailed the surge in Chinese stocks.

So here we are, stuck in a high-stakes waiting game. The big bad wolf has barked, but will it bite? March 12 is now the date to watch, and until then, traders are left navigating a minefield of uncertainty.

Trump’s initial tariffs may not be the economic sledgehammer many feared—falling well short of the 60% nuclear option he once floated—but make no mistake, this is just the opening act. Markets are grasping for a silver lining, with investors breathing a sigh of relief that the levies weren’t more extreme. But the reality? China is still in Washington’s crosshairs, and this reprieve could be short-lived.

Trump has made it crystal clear: his trade war isn’t about negotiation—it’s about eliminating trade deficits, full stop. And that mission all but guarantees China is in for more punishment. Even if Beijing wants to sidestep a full-scale confrontation, Trump’s tariff campaign is built on a zero-sum ideology, where the goal isn’t just fairer trade—it’s a complete recalibration of global supply chains in America’s favor. That means the current round of tariffs is likely just the first domino to fall.

US markets

Wall Street traders are in a tug-of-war between old and new economy stocks this week, with tech and steel sectors charging ahead on a mix of AI hype and tariff-driven volatility. Meanwhile, Treasuries are locked onto Federal Reserve Chair Jerome Powell’s latest testimony, as he once again played the role of market oracle, steering traders away from imminent rate-cut hopes while setting the stage for the week's big debt auctions.

As Powell's comments reinforced the Fed's wait-and-see approach, stock futures oscillated into Tuesday’s closing bell, mainly in response to rising long-term Treasury yields. However, the equity market found support from yet another surge in tech, led by AI chip giants Nvidia and Broadcom, both jumping nearly 3%.

Elon Musk’s latest move was fueling the AI fire—his consortium reportedly offered a staggering $97.4 billion to buy out the nonprofit controlling OpenAI. This unexpected twist in the billionaire’s battle against OpenAI’s transition to a for-profit model sent ripples across the market. Musk’s own Tesla, however, wasn’t spared, dropping 3% on the news.

Beyond the AI frenzy, broader optimism in U.S. equities stems from a surprisingly strong earnings season. With over 60% of S&P 500 firms having reported Q4 results, aggregate profit growth is tracking close to 15%, blowing past the 10% expectations from early January. Even revenue growth, hovering around 5%, is outpacing forecasts.

As traders navigate Powell’s signals, tariff uncertainties, and the shifting market narrative, the key dynamic to watch is the balance between AI-fueled euphoria and the reality check from higher yields.

To say a lot is going on in the markets right now would be the understatement of the year.

Asia markets

Meanwhile, Chinese mainland and Hong Kong stocks lost steam as the mounting tariff war cast a shadow over what had been an AI-driven rally, fueled by DeepSeek’s recent breakthroughs. The optimism surrounding China’s tech resurgence took a backseat as traders weighed the broader implications of escalating trade tensions.

That said, I still like the China AI play—it has the potential to borrow a chapter from the U.S. AI "Teflon" playbook. Just as AI megacaps in the U.S. have managed to weather macro storms, China’s AI sector could carve out a similar resilience, especially with Beijing backing tech as a key pillar of economic recovery. If the market can shake off the immediate tariff noise, we might see Chinese AI stocks start to exhibit the kind of durability that has defined their U.S. counterparts. Hence, we can see a bit of sectorial bounce feeding from US AI today.

But beyond AI, China’s auto sector took a sharp hit, with January car sales plunging 12% year-over-year—the first decline since September and the steepest drop in nearly a year. With automakers navigating the double threat of tariffs and a fierce global price war, investors are growing wary of just how much turbulence lies ahead for China’s economy.

The concern now isn’t just about trade—it’s about whether China’s domestic demand can hold up in the face of external headwinds. With competition heating up and pricing power eroding, the road ahead for Chinese equities looks increasingly bumpy.

Gold markets

Gold prices faced a reality check as Fed Chair Powell’s measured approach to rate cuts nudged yields higher, cooling some of the recent fervor in the yellow metal. However, the real kicker seemed to come from traders catching wind of the Bank of England’s “supply reassurance,” which helped ease concerns about liquidity constraints.

At the same time, the tariff-driven gold fever that had gripped markets seems to be fading—though that was an odd one to begin with. The idea that Trump would slap tariffs on gold always felt like a long shot, but it was enough to spark a speculative frenzy. Now, with that risk seemingly off the table and yields ticking higher, gold is taking a breather. That said, with persistent geopolitical tensions and central banks continuing to hoard physical bullion, the downside may remain limited.

Forex markets

Despite higher US yields and Chair Powell's lack of urgency in cutting rates—factors that should have dragged EURUSD lower—the euro is holding firm. Tuesday’s session saw a notable underperformance in EUR rates, with long-end yields rising to 7bp and even the short end climbing by 5bp. The primary culprit? Supply pressures. The EU and Italy were already in the market with syndicated deals, but France unexpectedly announced a new 30-year bond, adding to the mix.

Interestingly, spreads didn’t blow out—French government bonds over Bunds widened by just 1bp, while Italian spreads ticked up by 2bp. That tells me the market was more focused on broader crosscurrents, including mixed domestic data. France’s decline in unemployment added a hawkish twist, while the EU gearing up to counter Trump’s tariff push may be causing traders to rethink the recent slide in front-end rates.

We’re not concerned about the move since it is a "scalable trade," ultimately, the ECB is still on a path toward rate cuts, with markets watching for a shift to at least 2% by year-end.