Markets stabilize, but is it a dead cat bounce?

Markets are in a cautiously optimistic mood on Tuesday after wild swings on an historic Monday for risk assets. US stock markets fell modestly, although the Nasdaq managed eke out a gain, as Nvidia rose more than 3%, and the Magnificent 7 group of tech stocks managed to reverse earlier losses. Does this mean the sell off is over? We don’t think so, instead, we think that this is what real tariff fatigue looks like.

US stock futures are pointing to a higher open later today, and European markets are a sea of green. Aside from tariffs, there are some other fundamental factors to focus on this week, including US CPI and the start of Q1 earnings season. Although tariffs are the main threat hanging over global markets and the global economy, these could be good distractions to focus minds on what is happening beneath tariffs.

Can the FTSE 100 capitalize on a favourable tariff rate?

European stocks have opened broadly higher on Tuesday after the recent rout. Going forward, it will be interesting to see if the FTSE 100 outperforms its European counterparts due to the lower rate of tariffs applied to UK imports to the US compared to the EU. Energy and travel stocks are leading European markets higher. Stocks have bounced approx. 1.5% in Europe, which is modest considering the Eurostoxx 50 index sold off by 12% in the last week. However, it does suggest that the market is trying to find a bottom in amidst the tariff chaos.

Arbitrary comments from the White House

The President and his team failed to communicate a clear strategy about how the 50 countries who are supposedly negotiating a deal with the US to reduce levies will be able to do so. Alongside this, the President threatened to slap on another 50% tariff on Chinese imports as punishment for the 34% retaliatory levy on US imports to China. This would push up the tariff level on Chinese imports to the US to well over 100% if it is enacted.

Apple tries to get round the rules

Apple, who uses China as a manufacturing base, should be caught in the cross hairs of this tit-for-tat trade dispute, its share price fell 3% on Monday, bucking the trend for other tech stocks. However, even Apple could see its share price stage a partial recovery on Tuesday after reports emerged that Apple is trying to come up with a work-around to avoid US tariffs on China, by  sourcing more of its iPhones from India. This is not exactly what Donald Trump’s trade policy hoped to achieve, but it does highlight how nimble trillion dollar tech firms can be in the face of huge economic disruption. There could also be a mini silver lining for Apple and other firms. Reports suggest that there was a rush to buy iPhones in Q1 before Trump’s tariffs hit, which could boost Q1 earnings.

This phenomenon could delay economic pain in he US. Although the economy is expected to weaken substantially because of Trump’s tariff policies, it may not happen until later in the year. The coming months could see a boost to some consumption in advance of reciprocal tariffs taking effect. This could temporarily relieve some strain from markets.

Bond vigilantes not out in force yet

The bond market was in focus yesterday, as long end bond yields sold off sharply. During periods of stress, we expect to see the bond market rally, this was not the case. The surge in 10-year yields was a reaction to the overall market stress, which triggered concerns about fiscal stability. Yields are stable so far on Tuesday, which suggests that the bond market vigilantes are not targeting markets right now.

The dollar is lower across the board after strengthening sharply on Monday. Whether or not we see a prolonged market recovery could depend on what happens during the US session. These markets are driven by headlines, so any news from the White House has the potential to move markets. Since the tariff headlines have been unpredictable, it is hard to know with any conviction where markets will go next. We think that some clarity about how negotiations are going with nations aside from China could be welcomed by financial markets.