RUMORS OF LESS SEVERE TARIFFS SEND MARKETS ON A ROLLERCOASTER

Yesterday, markets experienced heightened volatility following rumors suggesting a softer stance from the Trump Administration on its tariff policies.

The speculation was quickly dismissed by President Trump himself, who labeled the reports as "fake news" on his social platform, Truth. However, the initial rumors created waves across financial markets and asset classes. 

According to The Washington Post, the Administration might be considering scaling back its campaign promises, applying tariffs only on imports deemed critical to U.S. national and economic security. 

This would mark a departure from pre-election threats of imposing a 60% tariff on Chinese imports and 10%-20% tariffs on goods from other trading partners.

Key sectors likely to be impacted, as per the Post, include:

• Defense: Tariffs on steel, iron, aluminum, and copper
• Medical Devices: Items like syringes, vials, and needles
• Renewable Energy: Batteries, solar panels, and rare earth elements

The rumors of a less aggressive tariff policy initially led to a depreciation of the U.S. Dollar, which lost over 1% against the Euro before recovering partially. Even after Trump’s denial, markets appear to believe that the potential impact of tariffs may be less inflationary than initially feared, potentially reducing the need for aggressive Federal Reserve intervention.

Just two weeks ago, the Fed unsettled markets with hints of smaller-than-expected rate cuts, raising concerns about potential implications for economic growth. Today’s developments shed light on the diverging movements of U.S. Treasury yields:

• 2-Year Treasury Yield: Decreased by 2 basis points, reflecting expectations of a more dovish Fed in light of reduced inflationary pressures.
• 10-Year Treasury Yield: Increased by 1 basis point, signaling optimism about fewer economic growth constraints from a softer Fed stance.

European markets also rallied, particularly automotive companies—among the sectors expected to face significant challenges under harsher tariffs. Automakers surged as much as 5% during the day before closing with a 3% gain after Trump’s dismissal of the rumors.

STOXX Europe 600 Automobiles & Parts Index (EUR)

U.S. companies with significant export exposure, especially in technology and basic materials, also benefited from the day’s market movements.

Source: Yahoo Finance

While uncertainty persists, yesterday’s events highlight the interconnectedness of trade policy, monetary policy, and market sentiment—factors that will continue to shape the global economic landscape.