On Wednesday, the US dollar index fell significantly. This notable drop-off underlines the growing concern in the business community over the direction of our trade policies and overall economic stability. The dollar’s counterperformance against six major foreign currencies largely fueled this fall. Now investors are trying to make sense out of the impact of these latest tariff announcements, and the overall US/China trade war melodrama.
Fear is rampant Market sentiment was last measured as “extreme fear,” as per CNN’s Fear and Greed Index. This is a trend that has continued through the past week since the end of March. This sentiment, combined with uncertainty surrounding trade policy updates from the White House, has led investors to adopt a cautious approach.
In March, spending at US retailers jumped at the fastest monthly pace in more than two years. From televisions to furniture, millions of eager Americans made their purchase in a panic before the forthcoming tariff increases that the then President Trump had proposed. Analysts at Citi noted that this rush reflects a heightened awareness among consumers and investors alike regarding the potential impacts of these tariffs.
“In the interim, if the recent flip-flopping around US tariffs and their implementation (as with last Friday’s reprieve for tariffs on tech) is anything to go by, the only certainty is that market participants will be forced to endure a period of extended market uncertainty,” – Analysts at Citi
Inflation spiked and the S&P 500 index fell suddenly after Fed Chair Jerome Powell indicated a hawkish tone in his comments. He stated that the economic impact of Trump’s tariffs is “continuing to be highly uncertain.” In fact, the index is now trading well below its closing price on April 2, a sign of the wider nervousness that’s gripping the markets.
“The level of the tariff increases announced so far is significantly larger than anticipated,” – Federal Reserve Chair Jerome Powell
Powell specifically described the economic impacts we can expect from these tariffs. He opined they would inevitably result in increased inflation and reduced growth.
Tensions between the US and China are at a recent high. Each country is locked in an intense race for supremacy in the field of artificial intelligence (AI). The recently announced export restrictions on Nvidia vehicles is a clear signal that this ongoing contest. Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, thinks trade talks will ultimately bear fruit. In the short term, she cautions, this kind of brinkmanship between the two countries is here to stay.
“While we expect that trade talks will ultimately yield progress, the brinkmanship between the US and China looks set to continue in the near term,” – Solita Marcelli
Investors are understandably on edge, waiting for news from the White House that can provide insight on where the administration’s trade policy is headed. Investor sentiment continues to be strongly affected by the uncertainty over tariffs. It’s this unpredictability that has the most crippling effect on both domestic and international markets.
The recent economic data showing very strong retail spending has all contributed to a very bullish vibe right now. Market panic muddies the waters for the next few trading days. Analysts are quick to point out that the astounding volatility we’ve seen over the last few weeks will likely persist as investors adjust to these headwinds.