A significant drop in the stock markets causes uncertainty, major losses for investors and savers, and plays with politicians' nerves. A sharp rise in bond yields in a country with high debt and significant external exposure triggers different reactions and could topple governments.
Today, the President of the United States, Donald Trump, after promising firm policies, stating no backtracking, mocking those attempting negotiations, urging companies to return to the U.S. by threatening those who had "abused" his country for decades, has made an almost 180º turn. He announced an immediate increase in tariffs on Chinese products to 125%, while simultaneously reducing tariffs on almost all other countries to 10%, with a 90-day pause on the so-called reciprocal tariffs. "I thought people were getting a bit carried away. They were getting a bit too excited, they were scared," he admitted on television two hours after causing yet another financial earthquake. "Flexibility is needed."
Although presented as a success, the capitulation is undeniable after a tumultuous night where major debt holders, likely China and Japan, pulled the plug, causing a spike in risk premiums reminiscent of the crisis 15 years ago in Southern Europe. The announcement is not good news in absolute terms, as it still implies a protectionist barrier unseen in a century, with a general 10% tariff added to those on steel and aluminum, plus upcoming tariffs on pharmaceuticals, cars, and leaving another 90 days of pure uncertainty. However, it has been relatively positive for the market, relieved by what is seen as a sign that perhaps not all will be lost.
With adrenaline, the Nasdaq closed up 12.16%, driven by major tech companies. The Dow Jones Industrial rose by 7.87%. The S&P 500 surged by 9.5%, the largest single-day increase since 2008.
A universal 10% is closer to what analysts expected before the "day of liberation" when Trump caught everyone off guard, allies and foes alike. However, this decision is made by one person alone, not consulting his team, subject to change at any moment. Adding to the uncertainty, the President, once again changing his mind, now said he might consider exempting some U.S. companies from tariffs during the 90-day pause, stating the decision would be made "instinctively". Pure arbitrariness, but also a loophole for corruption.
The 'responsible' voice amid the chaos seems to be the Treasury Secretary, who desperately traveled to Florida over the weekend to try to align the message with the President's inner circle. He did not succeed, but he has been the most vocal in trying to turn a global trade war into a coalition of allies to isolate the main rival: China.
The shake-up came with a message on Truth Social at 1:18 PM, Washington local time. "Due to China's lack of respect for global markets, I hereby increase the U.S. tariff on China to 125%, effective immediately. Hopefully, at some point in the future, China will understand that cheating the U.S. and other countries is no longer sustainable or acceptable," he wrote on social media after the 10-year Treasury bond continued to rise, reaching 4.5% on Wednesday.
"On the other hand, considering that more than 75 countries have called upon representatives from the United States, including the Departments of Commerce, Treasury, and the U.S. Trade Representative (USTR), to negotiate a solution to trade issues, trade barriers, tariffs, currency manipulation, and non-monetary tariffs, and that these countries have not retaliated against the U.S. in any way, at my urging, I have authorized a 90-day PAUSE and a substantial reduction in reciprocal tariffs during this period, to 10%, also effective immediately. Thank you for your attention!" he wrote.
The face of the day was Jamieson Greer, the country's trade representative, who was completely unaware and learned of the decision during a congressional hearing while vehemently defending the previous line. Other high-ranking officials and advisors appeared in the media unable to explain the alleged logic, caught off guard having to say the opposite of what they had stated hours earlier. But like enthusiasts in authoritarian regimes, they applauded and praised the leader as "a genius," a "master of negotiation," celebrating "one of the best days for the economy in history."
No consistency
An explanation with little credibility after humiliating those who were calling for negotiations last night, saying they were "kissing his ass." It is impossible that any negotiations could have taken place, with top economic officials appearing on television full time. And without coherence, as the punitive measure, which supposedly 'benefits' those seeing their tariffs reduced to that general 10%, changes nothing for any other country, like the UK or those in Latin America, who already had the same percentage.
From the wording, it was not clear enough if it refers only to those who have not applied retaliatory tariffs, as the European Union has done, for example. Whether the 90-day pause applies to the entire planet or specific countries. Or if the reduction to 10% is immediate and the 90-day pause is for other tariffs (for example, the additional 10% for the EU up to the 20% set last week). The White House spokesperson, Karoline Leavitt, confirmed that the 10% will be universal, criticizing those who fail to see the alleged brilliance of the strategy of the past week. Later, Trump, showing his unawareness of the EU's announced retaliatory measures, clarified that since the measures are not in effect, there is no issue, and the tariff is reduced from 20% to 10%.
The market reaction was immediate and brutal, with increases of 7% and 8% in the stock market, up to 10% in the Nasdaq, driven by major tech companies. Interestingly, Trump had written a few hours earlier that it was a great day to buy. Anyone who anticipated the tweets' direction could buy very cheaply and make millions.
For months, Trump has been telling his citizens that glorious days are coming. They should buy American products, produce in America, sell in America. But when the protectionist measures took effect, with tariffs unseen in a century capable of sinking entire nations, the rest of the world responded that perhaps it is time to do the opposite: sell American goods. Their stocks, their bonds, their dollars.
In the past week, seven days since the celebrated "day of liberation" by Donald Trump, U.S. indices have dropped over 13%, destroying over $11 trillion. The White House's response is that it was a correction, an adjustment, a phase to tighten belts and "endure," reassuring that their bond yields were moving in the desired direction, downwards.
However, in recent sessions, this trend has reversed, causing brief moments of panic, such as Tuesday midnight, Washington time, when an unspecified event caused a vertical spike in the 10-year bond yield. Hours later, it added another 0.2% to reach 4.45%, a significant move in that market, as it was trading below 4% just days ago. This would have triggered Federal Reserve intervention in the past, as the main holder, now caught between inflation pressures and the possibility of a contraction.
30-year volatility
The volatility even reached the 30-year bonds, above 5%, likely due to hedge funds operations known as "basis trades," playing with small value differences between an asset and its futures, a vulnerability in the financial system if a deep crisis occurs. Now there is a need for liquidity, but also automatic forced sales when portfolios cross predetermined minimum thresholds.
"I don't think there is anything systemic in this; I think this is an uncomfortable but normal deleveraging happening in the bond market," stated Bessent a couple of hours before Trump tried to stop the market bleeding by giving in.
However, the Secretary had already caused another small storm by suggesting that the White House does not rule out imposing some form of capital controls on exports, a "blacklist of things in which the United States—be it pension funds, endowments, or investors—should not invest to finance the Chinese military machinery."
"Long-term interest rates are showing an upward gap, even as the stock market sharply declines. This highly unusual pattern suggests a widespread aversion to U.S. assets in global financial markets. Global financial markets are treating us like a problematic emerging market," economist Larry Summer, who served as Treasury Secretary under Bill Clinton, wrote on his Twitter account. "This could trigger all kinds of vicious cycles, given the debts and government deficits and the dependence on foreign buyers," he added.
Movements, such as the fact that the dollar is starting to depreciate again, suggest that foreign investors are behind, not only selling company stocks due to the growing fear of a recession, but something deeper, as they are getting rid of assets considered safer, which are normally sought in times of uncertainty. At least a third of the US public debt is held abroad, mainly in Japan and China, with more than 20% of the total between both and in that order. Although US banks have room to absorb part of that supply, especially if the Government picks up the phone, they cannot mortgage their balances with an increasingly unstable product. "The sell-off may show that US debt is no longer a safe haven in times of risk aversion," Citi agrees.
The vulnerabilities of the superpower
The nerves are now much more visible, everywhere, but especially in the country that has enjoyed for decades the advantages of having the dollar, the world reserve that practically allows for fiscal deficits and high indebtedness without great fears of the consequences, unlike other countries. Just ask Greece, sunk in its crisis for more than a decade and now surprised to see how its 10-year bond has to pay less than the American one.
"If a stock market drop is a sign of bad times, the rise in Treasury bond yields and the drop in demand for assets denominated in US dollars are potentially an indicator of very, very bad times: not only do they destroy retirement accounts, but they undermine the monetary power of the United States and its ability to finance persistent deficits," points out Erin Lockwood, a professor at the University of California, Irvine.
The United States is at the center of the system, it is stronger, has benefits, but it is not invulnerable. If confidence in the US government's commitment to economic liberalism, trade, institutions is seriously damaged, as it is the case, this affects confidence in US assets. If Europeans are aware of the need for greater investment in defense and conclude that they cannot trust Washington, they will have to look for alternatives, even if there are few and not very good ones.
Similarly, if the market concludes that the administration is unpredictable, does not act rationally, and is willing to do anything to advance its agenda, with ministers unable to control the leader, or even tell him what is happening in the real world, investors and savers will also soon assume that when Trump replaces Jerome Powell at the head of the Federal Reserve, it will be with a puppet. Removing one of the few existing checks and balances.