Calm before the counteroffer: Markets brace as trade talks move from fire to fog

US stocks drifted lower Tuesday as traders took a breather and turned their eyes toward the next act in this global trade theatre — and make no mistake, it’s a big one. We’re entering what could be the most critical phase yet: the start of actual negotiations with both allies and adversaries. This is where the fog of war starts to lift — or thickens fast.

Markets are now treating Tokyo and Beijing talks as the real litmus test. Expect a relief rally on every handshake and headline if deals start forming. But if things stall? We’re straight back to risk-off roulette.

Compared to last week’s chaos, Tuesday felt like a relative lull — a calm mostly engineered by the Fed and Treasury flashing their bond market backstop badges. That helped suppress volatility, even as trade nerves remained. Remember, just a few sessions ago, we were bouncing around on every tariff tweet and bond market plumbing scare.

The market upheaval left a trail of carnage. The aftermath was textbook market triage: margin calls kicked in, portfolios were rebalanced on the fly, and profitable assets were dumped to plug holes. That frantic scramble only fueled the fire, amplifying market stress. It was less about strategy and more about survival.

But buckle up; now comes the hard part: separating US friends from foes and pricing “ The Art of the Deal “ unknowns.

The positive sentiment is already fading — and fast. Rather than clinging to political soundbites tailor-made for op-eds, traders are now zoning in on what really matters: hard data. And the early reads are flashing red.

Trade war angst isn’t simmering under the surface anymore — it’s bleeding through in real-time data tape. Just look at China: port data released Monday showed cargo volumes plunging. Last week, Chinese ports handled 244 million tons — that’s down 10% from the prior week and 4% year-on-year. Not exactly the stuff of soft landings.

But it’s not just China. Europe’s seeing a wild surge in ship traffic — Antwerp hosted 226 vessels in early April vs. just 34 a year ago. Rotterdam and Hamburg are seeing similar pile-ups. Why? Because vessels are getting rerouted to avoid looming U.S. tariffs, with whispers of a $1 million docking fee on China-bound ships now floating through the markets. That’s not a typo — that’s a wrecking ball to global shipping flows. A massive inventory overhang is building, and if it sticks, brace for a sharp production collapse — first in China, then in the rest of the world.

On the inflation front, the NY Fed’s 1-year expectations just jumped from 3.13% to 3.58% — the biggest surge since Feb 2023. But here’s the twist: Fed Governor Waller is framing tariffs as a temporary inflation bump, arguing that the growth hit will outweigh the CPI spike, and therefore justify easing. Dollar bearish, right?

Well, not so fast. The greenback is actually stronger today — and even as U.S. equities sag. Why? Three reasons:

The bond risk premium is easing. The Fed and Bessent’s soft backstop are working. Yields are coming off, plumbing’s stabilizing, and U.S. assets are suddenly less radioactive.

The euro was stretched. As we flagged Monday, EUR/USD was overbought and ripe for a fade. Ahead of a major risk event like the ECB, risk managers tend to lighten up, regardless of bias. That’s not euro hate — it’s just standard tape management.

Cleaner, calmer price action. Reflexivity is returning. Bonds are rallying as stocks dip — the market’s no longer acting like a headless chicken.

Some pretty unsavoury data prints are hitting the EU tape, and it’s definitely not doing the euro any favours. The near-term outlook looks economically nasty from where I’m sitting—but I’ll save the nuts and bolts for later in the FX report. First, I need to hit my morning run to clear my head and fine-tune the game plan. (Not that I didn’t already map it out yesterday, but a little endorphin boost never hurts.)

As noted on Monday, I planned to roll off a chunk of EUR longs this week into the ECB event risk. I still hold a deep in-the-money core, but the pre-positioning shakeout was too obvious to ignore. Once the ECB’s out of the way, we’ll trade what’s in front of us. But for now, the path of least resistance was to cut risk and reload later, hopefully at a better entry point than I cut.