Historic Monday for markets

It’s turning into a Monday to remember for stock markets. US stocks markets tanked at the open, before surging into positive territory on the back of reports that President Trump would pause tariffs for 90 days. This was swiftly denied, US stocks turned lower once again, before even more reports emerged of another trade bust up between China and the US. The market moves have been brutal today, volatility as measured by the Vix has surged to its highest levels in nearly 5 years and is closing in on peak Covid volatility levels.

Market distress levels rise

Equities are not the only volatile asset class on Monday, oil and the gold price are tumbling, the dollar has had a massive reversal and GBP/USD is down more than 1.3%, after dropping nearly 200 points this afternoon. The bond markets are also in reverse. UK and US bond yields are moving sharply higher. The 10-year UK Gilt yield is up by 16bps so far on Monday afternoon, after initially declining. UK bonds are under performing global bond markets. US Treasury yields are rising albeit at a slower pace than UK yields, they are currently higher by 11bps. Short term UK and US bond yields have also staged a reversal and are moving higher, while European yields are stable.

Could FX stress levels exacerbate the crisis?

The sharp stock market sell off and surge in volatility is causing consequences for other markets. As confidence drains from financial markets, stresses are starting to show up in other asset classes. Last week the talk was about high yield credit spreads, today FX is in the cross hairs.  The FX basis swaps market, which is a derivative contract where two parties exchange interest payments and principals in two different currencies to hedge exchange rate risk, has seen unusual price action. EUR/USD basis swaps trades are falling sharpy, which is indicative of demand for dollars. The world tends to rush to dollars when volatility spikes and recessions or damaging economic events happen, like the financial crisis. The sustained market sell off, combined with President Trump’s refusal to budge when it comes to tariffs, could cause a surge in demand for dollars, which may trigger economic crises around the world, and could also work against his grand plan to reduce the US trade deficit.

Where do markets go next?

It is hard to pin down where stocks will go next since one theme is dominating markets: President Trump’s massive overreach on tariff policy and its economic and financial effects. Markets are moving on the back of news headlines. For example, the stock market recovery that we witnessed earlier on Monday, is fading after Trump threatened another 50% tariff on China due to a breakdown in talks and as punishment for China’s retaliatory tariffs on US imports.

The tariff saga seems like it is never ending, yet it has only been 3 days of sharp market sell offs. Will President Trump only row back on his plans if he breaks something? The FX market is looking shaky, and if bond yields continue to rise sharply, the UK’s fiscal health could be called into question.

Semiconductors benefit from respite, as Magnificent 7 moves higher

The Magnificent 7 has also reversed course, and US tech stocks are outperforming on Monday. From a sector perspective, we have seen a reversal in fortunes for the semiconductor sector which is the best performing sector on the S&P 500, Nvidia is higher by more than 1.5% on Monday, as the most sold sectors in recent days start to make a recovery. This could be short lived, but it is an interesting development. The S&P 500 copper sector is also higher, which is also an interesting development. Copper is closely linked to global growth expectations, the fact that it is a strong performer on Monday could be a sign that the markets believe Trump will eventually pause or revoke tariffs, albeit not for China.

What a recovery could look like

The market reaction to rumours that Trump would pause tariffs should be noted by the White House. Markets surged and bonds sold off, the dollar also reversed course. This was a taste of what to expect if Trump moderates his stance on tariffs in the coming days or weeks. Trump’s tariff announcement has been a PR disaster for the president, and the market sell off could also weigh on his popularity at home, as Americans feel poorer.  The power to reverse that is in the President’s hands.

لا تشكل المعلومات الواردة في هذه الصفحة مشورة مالية، ولا تأخذ في الاعتبار مستوى فهمك أو أهدافك الاستثمارية أو وضعك المالي أو أي احتياجات محددة أخرى. جميع المعلومات المقدمة، بما في ذلك الآراء وأبحاث السوق والنتائج الحسابية والتحليلات الفنية المنشورة على الموقع الإلكتروني أو المرسلة إليك بوسائل أخرى، تُقدم لأغراض إعلامية فقط ولا ينبغي بأي حال من الأحوال تفسيرها على أنها عرض أو دعوة لإجراء معاملة في أي أداة مالية، كما لا ينبغي تفسير المعلومات المقدمة على أنها مشورة ذات طبيعة قانونية أو مالية تستند إليها أي قرارات استثمارية تتخذها، بل يجب أن تستند حصريًّا إلى مستوى فهمك، أو أهدافك الاستثمارية، أو وضعك المالي، أو احتياجاتك المحددة الأخرى؛ وأي قرار بالتصرف بناءً على المعلومات المنشورة على الموقع الإلكتروني أو المرسلة إليك بوسائل أخرى يكون على مسؤوليتك الخاصة تمامًا. إذا كنت في شك أو غير متأكد من فهمك لمنتج أو أداة أو خدمة أو معاملة معينة، فيجب عليك طلب المشورة المهنية أو القانونية قبل التداول. ينطوي الاستثمار في عقود الفروقات (CFDs) على مستوى عالٍ من المخاطر، حيث إنها منتجات تعتمد على الرافعة المالية، وغالبًا ما تؤدي التقلبات الطفيفة في السوق إلى تقلبات أكبر بكثير في قيمة استثمارك، وقد يعمل ذلك ضدك أو لصالحك. يرجى التأكد من فهمك الكامل للمخاطر التي ينطوي عليها ذلك، مع مراعاة أهدافك الاستثمارية ومستوى خبرتك، قبل التداول، وطلب المشورة المستقلة إذا لزم الأمر.

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