Summary
- A 90-day pause on higher tariffs (excluding China) sparked relief rallies, with US equities up 5.7% and tech surging 9.6%
- Despite the reprieve, Washington’s strategic push to restructure global supply chains away from China suggests tariffs are here to stay
- Gold rose 6.6% reaching all-time highs and closing the week at US$3,237.61/oz, benefiting from market stress, geopolitical risks, and a structural shift away from treasuries as reserve assets
- US treasury yields surged, with the 10-year rising 0.5% to 4.49% amid the highest volatility since October 2023; foreign selling—likely from China—appears to have driven the reversal
- UK 10-year gilt (UK government bonds) yields also climbed 0.31% to 4.75%, with leverage and volatility contributing to investor de-risking
- UK inflation data due Tuesday is expected to show a slight dip to 2.8%, though a rebound to 3.5% in April may slow the Bank of England’s (BoE) easing path
- The European Central Bank (ECB) is expected to cut rates by 0.25% on Thursday, with softer inflation and weakening demand giving it room to move.
Markets last week
Heteroskedasticity in motion
Heteroskedasticity is the mathematical term for unstable stability; something calm one moment, chaotic the next. The last couple of weeks have been a great example of the heteroskedasticity of financial markets. Volatility has surged across asset classes since President Trump’s ‘Liberation Day’ tariff announcements. On some days, it has felt like a month happened in a single session.
Last week President Trump provided some much-needed relief to equity markets announcing a 90-day pause on higher rate tariffs, except for China. US equities bounced 5.7% over the week with the technology sector surging 9.6% making it the best performing sector by some margin. But this partial reprieve may be little more than tactical. The broader strategy in Washington likely remains unchanged; to restructure global supply chains away from China, which is increasingly viewed not just as a competitor, but as a strategic adversary. If so, tariffs are not going away and should be viewed as part of a more holistic strategy.
Gold notched a 6.6% return, hitting an all-time high and closing the week at US$3,237.61/oz. While gold typically thrives during periods of market stress, inflation, and geopolitical tension, it’s also gaining from a broader shift in global capital flows. The US move toward protectionism has raised questions around the long-term role of treasuries as reserve assets, prompting central banks to seek alternatives and gold is an obvious choice.
Bond yields surge
Government bond yields surged over the week with volatility in US treasuries hitting the highest level since October 2023. The 10-year US treasury yield rose 0.5% to close at 4.49%. Foreign countries are some of the biggest owners of US government bonds with China holding $760bn, having already significantly reduced their holdings in recent years. Initially, US treasuries benefited from a brief ‘flight to quality’ following the ‘Liberation Day’ trade shock. But last week saw a total U-turn and an exodus from bonds.
The likely driver? Foreign selling, most probably from China, as the trade war escalates. The 10-year gilt yield also rose 0.31% to 4.75%, seemingly dragged along by correlation. That said, the gilt market is more leveraged, and heightened volatility may have contributed to an unwind as institutional investors de-risked.
The week ahead
Tuesday: UK inflation
Our thoughts: Economists expect UK inflation to soften marginally to 2.8% with disinflation in the key area of services inflation. This progress is likely to be short lived as inflation is forecast to rise to 3.5% in April. Higher inflation will force the BoE to move more gradually with normalising policy.
Thursday: ECB rate decision
Our thoughts: The ECB will likely cut rates by 0.25% this week. The world has changed quite a bit since their March meeting. The risks in the eurozone are now tilted to the demand side and with inflationary pressures subsiding the ECB have the flexibility to ease policy more quickly.
Markets for the week
Sources: FTSE, Canaccord Genuity Wealth Management