The market's reaction to Trump's reciprocal tariffs announcement was muted

Market

US yields easily returned most of Wednesday’s rise incurred after stronger than expected January CPI data. The move is telling on the current market positioning/assessment. The ‘correction’ started after and despite higher than expected US January PPI data. Markets apparently concluded that the bar is extremely high for the Fed to consider raising rates from current levels (economically and politically). With no more than one Fed rate cut discounted toward the end of this year, markets risk/reward see some value in US bonds after Wednesday’s sell-off. Treasuries started a comeback to finish the day between 4.8 bps (2-y) and 9.5 bps (30-y) lower. A $25bn 30-y US Treasury auction tailed, but after all didn’t hamper the intraday rally. German yields followed the US move with yields declining between 4.9 bps (2-y) and 6 bps (5-10y). Interesting/remarkable: the EMU yield move decoupled from an impressive rally in European equities. This is at least partially inspired by market hope that (US-led) negotiations on the war in Ukraine might at least remove one of the uncertainties for the region’s ailing economy. The Eurostoxx 50 index closed just a whisker away from the March 2000 all-time record! After the close of European markets, US president Trump announced a wide-ranging plan to impose reciprocal tariffs on the US’s trading partners. The system will work on a country-by-country basis. It will not only take into account tariffs, but also non-tariff barriers including regulations that are seen as unfavourble for US trade, subsidies and domestic taxing policy e.g. VAT and sales taxes that are applied by some trading partners. Trump also indicated that he intends to put in place additional taxes on autos, chips and pharmaceuticals on top of the reciprocal system. The market reaction to the announcement was muted. As it can take until April (or maybe later) for the system to be operational, markets conclude that there is still time to negotiate. US equity gains accelerated even after the announcement with major US indices closing between 0.7% (Dow) and 1.50% (Nasdaq) higher. The broad risk-on and sharp decline in US yields put the dollar on the backfoot. The DXY index dropped to 107.31 (from 107.87). USD/JPY almost fully reversed Wednesday’s jump higher (close 152.8). EUR/USD closes at 1.04.6.

Risk sentiment remains constructive in Asian dealings this morning. Later today, the calendar contains details of EMU Q4 GDP growth (0% Q/Q) and US retail sales. Headline retail sales are expected to decline by 0.2% M/M (weather-related). Control group sales are expected at 0.3% M/M. Considering this week’s price action, (FI and FX) markets might be a bit more sensitive to a weaker than to a stronger than expected figure. We also keep an eye at EUR/USD. The 1.0533 January top is the next reference on the technical charts. Both euro strength and USD softness might be in play. DXY also nears key support just below 107.

News and views

Swiss National Bank board member Tschudin showed willingness to return to sub-zero interest rates if necessary to achieve price stability (inflation between 0% and 2%). “It allows us to steer the rate differential also in a lowinterest environment in a way that the franc becomes less attractive than other currencies and therefore doesn’t appreciate excessively.” The key Swiss policy rate currently stands at 0.50%. The comments came after Swiss data yesterday showed inflation easing further in January (-0.1% M/M & 0.4% Y/Y). While not a fan, SNB president Schlegel earlier kept the option of negative policy rates open as well. Tschudin added that the SNB will continue to intervene in FX markets to prevent a too strong Swiss franc even as it risks being labeled a currency manipulator by the US. The EUR/CHF 0.92-0.93 bottom is becoming stronger with the pair testing first resistance in the 0.95 area.

The European Commission’s vice-president in charge of digital policy told the Financial Times that the EU wanted to help and support companies when applying AI rules. Virkkunen wants to cut back tech regulation: “we are committed to cut bureaucracy and red tape”. The EC has this week withdrawn a planned AI liability directive and an upcoming code of practice on AI, expected in April, will limit reporting requirements to what is included in the existing rules. Virkkunen insisted that the deregulatory push in an EU-initiative and not dependent on the US.

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