Futures Swing Wildly As China Retaliates, Basis Trade Blows Up Sending Yields Soaring

The rollercoaster goes on as stock futures continue to swing wildly, and now we have the extra kicker of the $2 trillion basis trade blowing up and sending bond yields soaring in the US and across most developed economies just as stocks tumble, leading to a complete wipe out of all 60/40 "balanced" portfolios. US futures had slumped as much as 3% overnight amid the ongoing collapse of the basis trade, which we first profiled here, only to reverse and turn briefly green just after 3am ET after China released a White Paper on US trade in which it hinted that it was "willing to communicate with the US" but that initial bounce quickly faded after China also warned it would retaliate... and then it did just that after 7am ET, when Beijing announced it would match Trump's latest and raise tariffs on US goods to 84%; this quickly sent futures back near sesion lows and down 2%. Pre-market, Mag 7 names were mixed (Tesla +0.39%, Nvidia +0.22%, Apple +1.1%, Meta +1%, Amazon +1%, Alphabet -0.9%, Microsoft -0.8%), while healthcare stocks were lower as pharma tariffs are earmarked to be released soon. Meanwhile, as we described first late last night, forced sales resulting from the unwind of the basis trade have slammed the Treasury market, where yields surged over the last few sessions and 2Y to 30Y yields are higher again today. At one point the 10Y was as high as 4.50%; this morning JPM asks a question: "If trade imbalances are zeroed out, do foreign countries need to hold Treasuries?" USD is weaker and commodities are mixed with Base Metals/ Energy lower, goal soaring higher, and Ags mixed. Fed Minutes are released this afternoon with CP| tomorrow.

In premarket trading, Mag 7 names were mixed (Tesla +0.39%, Nvidia +0.22%, Apple +1.1%, Meta +1%, Amazon +1%, Alphabet -0.9%, Microsoft -0.8%), while drugmaker stocks slide after Trump said the US is planning to announce “a major tariff” on the sector soon: (Pfizer -4.1%, Merck -3.4%, Bristol-Myers Squibb -3.9%, Biogen -2.0%, Eli Lilly & Co -3.3%, Amgen -3.7%, Moderna -2.5%, Johnson & Johnson -3.4%). US-listed Chinese stocks pare gains from earlier in the premarket session or fall as China retaliates with an 84% tariff on US goods (Alibaba +3.1%, Nio +0.32%, Baidu +0.18%, PDD -1.6%, JD.com +2.9%, NetEase +0.40%, Trip.com +2.5%, Li Auto +1.0%, KE Holdings +2.2%, Bilibili +4.2%). Here are some other notable movers:

• Cal-Maine (CALM) drops 5% after the egg producer reported results that missed estimates. The company also said it received a civil investigative demand from the Department of Justice Antitrust Division into the causes behind the increase in egg prices nationwide.
• Constellation Energy (CEG) shares inch higher by less than 1% after Citi upgraded the nuclear power provider to buy, citing a more attractive risk-reward following the selloff in equity markets.
• Ford Motor (F) slips 2.9% as Bernstein downgraded the carmaker to underperform, saying significant downside is not priced in by the market yet.
• Peabody Energy (BTU) soars 12% after Trump signed executive orders to expand the mining and use of coal in the US. Also, late Tuesday, Peabody said it is reviewing a deal worth up to $3.78 billion to buy Anglo American Plc’s steel-making coal business after a fire at an Australian mine.
• Satellogic (SATL) jumps 4% after the satellite company said it had been awarded a $30 million contract to provide analytics to a “strategic defense and security customer.”

While China's escalation was notable, if expected, the biggest news overnight was the collapse of the basis trade, which we first correctly predicted last week and described overnight; this is sending yields soaring amid forced liquidations, even as stocks continue to slide.

“We’re well into an escalation phase in the trade war and investors have just nothing to hold onto at the moment,” said Alexandre Baradez, chief market analyst at IG Markets Ltd. “What’s clear now is that the US bond market is no longer a safe haven for investors, but on the contrary is piling pressure on stock markets.”

Meanwhile, shares in large US and European drugmakers fell after Trump said the US was planning to announce “a major tariff on pharmaceuticals” soon. Pfizer Inc., Eli Lilly & Co. and Merck slid more than 3% in US premarket trading.

The worsening trade conflict, with Trump raising levies on China to 104% at midnight, has been condemned by investors including Bill Ackman and prompted economists at JPMorgan and Goldman to raise the probability of a US recession. That would complicate the Federal Reserve’s policy response if it has to contend with an inflation spike brought on by the tariffs. 

Investors were gripped by concerns that something may break in the financial plumbing as volatility and stress build across markets. Ray Dalio, the billionaire founder of Bridgewater Associates, warned about a “once-in-a-lifetime” breakdown occurring in monetary, political and geopolitical orders. 

“We’re reaching a new stage in the selloff with now serious concerns that the high volatility could trigger market accidents and possibly something systemic,” said Alexandre Hezez, chief investment officer at Group Richelieu in Paris. “If the Fed is forced to intervene and cut interest rates despite Trump’s inflationary policies, then 10-year yields will jump even further.”

Europe's Stoxx 600 drops 3%, with all sectors in the red. Health care, energy, and telecoms lead losses. UK and German yield curves steepen as two-year yields drop, while long-end rates climb. Here are the biggest movers Wednesday:

• Pharmaceuticals and energy stocks are the hardest-hit European sectors amid a broad-based selloff in equity markets after US President Donald Trump hiked trade tariffs to a 100-year high
• The Stoxx 600 basic resources sector dropped as much as 4.1% on Wednesday. The declines come as copper extends its slump, with industrial metals hit by the intensifying global trade war and recession fears.
• Wolters Kluwer briefly gains as much as 1.4% as BofA Global Research raises its recommendation on the information services and solutions provider to buy
• Redcare Pharmacy slumps as much as 17%, the most in almost three years. The German online pharmacy launched €300 million convertible bonds and invited holders of the already outstanding €225 million to tender their bonds for cash
• ITV shares drop as much as 8.3%, hitting their lowest level since November, after the UK broadcaster was downgraded to sell by UBS amid an expected decline in ad revenue and concern around streaming
• PageGroup slips as much as 4.3% to the lowest level since 2016 after the UK recruitment firm said it won’t provide forward-looking guidance because of market uncertainty caused by the introduction of tariffs
• Santander Polska’s shares trade as much as 2.8% lower in Warsaw after surging 6.5% on Tuesday in the wake of a Bloomberg News report that its Spanish parent may be seeking an exit.

Earlier in the session, Asian stocks dropped as tariffs implemented by President Donald Trump took effect, with total levies on China climbing to 104%. The MSCI Asia Pacific Index fell 1.4%, with TSMC, Hitachi and Mitsubishi among the biggest drags. Taiwan’s benchmarks tumbled more than 5%, while key gauges slid more than 3% in Japan. Shares in Korea slumped into a bear market territory, while shares in Hong Kong and China advanced thanks to continued buying by China's plunge protection team. Markets “probably will continue to see some wild gyrations this week, and longer as markets work through this tariffs episode,” said Kok Hoong Wong, head of institutional equities sales trading at Maybank Securities. Potential responses from Europe and elsewhere will be among key points to watch.

The exodus spread to other markets. The UK’s borrowing costs surged to the highest since 1998, and Japanese 40-year bond yields struck a record high. US treasuries also held losses, extending past week’s steep selloff, with some paring after China raised tariffs on US goods to 84%, triggering a drop in stock futures. Intermediate and long-end yields are higher on the day by as much as 10bp, front-end by about 4bp. US yield curve has steepened further, though spreads are off session highs, with 2s10s wider by about 4bp, 5s30s by about 1bp; 10-year yield around 4.37% is 8bp higher on the day, with bunds outperforming by around 9bp in the sector, gilts by ~1bp. 

UK 30-year yields earlier hit their highest since 1998, as contagion from the selloff in US 30-year bonds spread.  Swap spreads - which is where the collapse of the basis trade can be seen clearest - likewise extended past week’s violent narrowing move, with long-end tenor dropping as low as -100bp. US session includes $39 billion 10-year note auction at 1pm New York time. Treasury auction cycle continues with $39 billion 10-year note reopening, following soft demand for Tuesday’s 3-year note sale, which tailed by 2.4bp tail and had above-average dealer allocation. Cycle concludes Thursday with $22 billion 30-year

In FX, the Bloomberg Dollar Spot Index falls 0.5% while the Aussie dollar climbs 1% versus the greenback, topping G-10 FX. 

In commodities, spot gold surges ~$75 to around $3,056/oz. Oil prices decline, with Brent falling close to 4% to just above $60 a barrel.

Looking at today's calendar, all eyes will be on the trade war and swap spreads US economic calendar includes February wholesale inventories at 10am; Fed speaker slate includes Barkin at 11am at Economic Club of Washington DC; minutes of FOMC’s March meeting will be released at 2pm

Market Snapshot

• S&P 500 mini -2%
• Nasdaq 100 mini -1.6%, 
• Russell 2000 mini -1.8%
• Stoxx Europe 600 -2.5%, 
• DAX -2.2%, 
• CAC 40 -2.2%
• 10-year Treasury yield +17 basis points at 4.46%
• VIX +5 points at 56
• Bloomberg Dollar Index -0.4% at 1264.61, 
• euro +0.5% at $1.1013
• WTI crude -3% at $57.82/barrel

Top Overnight news

• President Trump signed executive orders related to coal and later posted on Truth "Today, we took historic action to help American workers, miners, families and consumers. We're ending Joe Biden's war on beautiful, clean coal once and for all, and we're going to put the miners back to work!"
• President Trump posted on Truth "I had a very good meeting today with the Speaker of the House and some of our more Conservative Members, all great people. I let them know that, I AM FOR MAJOR SPENDING CUTS! WE ARE GOING TO DO REDUCTIONS, hopefully in excess of $1 Trillion Dollars, all of which will go into “The One, Big, Beautiful Bill.” I, along with House Members and Senators, will be pushing very hard to get these large scale Spending Cuts done, but we must get the Bill approved NOW. MAKE AMERICA GREAT AGAIN!".
• China retaliated to new tariffs imposed by President Donald Trump by announcing it would raise duties on US goods, roiling markets and deepening a trade war between the world’s largest economies: BBG
• Reconciliation bill at risk as Trump’s tariffs catalyze an economic downturn, threatening revenue assumptions embedded in the legislation. WaPo
• BOJ’s Ueda signals the central bank will pause its rate hike campaign amid extreme uncertainty in the global economy. RTRS
• Fed in a difficult spot as Trump’s policies threaten to weaken growth and fuel inflation, which means monetary authorities won’t be able to rush to the rescue as in past panics. WSJ
• Tariff negotiations aren’t happening in any serious way as White House officials fail to engage with other countries and have yet to outline the specific concessions they expect to receive. Politico
• Drug tariffs could be next – Trump Tues night reiterated that his next target for tariffs could be the drug industry (he said he would announce “a major tariff on pharmaceuticals very shortly”). NYT
• Navarro was pushing for a 25% blanket tariff on all imports along w/the reciprocal levies and Trump considered the idea before opting for 10%. White House shifts tariff power from Navarro/Lutnick toward Bessent/Greer as negotiations take place w/several trading partners in the hope of deescalating tensions. BBG / FT
• House Republican opposition to Trump’s trade policies grows as 12+ could sign on to support a bill that would impose restrictions on the White House’s tariffing powers. AXIOS
• DAL just officially kicked off Q1 earnings season and is trading +1%.. Growth has 'largely stalled' with trade uncertainty.. Not reaffirming FY guidance 'given current uncertainty': Q1 EPS $0.46 vs. Cons $0.38 on in line revenue of $12.98bn. For Q2, guides EPS to $1.70-$2.30 vs. Cons $2.21. Guided 2Q rev growth to (2%) to +2% y/y vs. Cons +1.7%. Expect continued resilience in premium, loyalty and intl partially offsetting Domestic and main cabin softness. Expect June qtr profitability of $1.5-$2bn    DAL is not reaffirming full year 2025 financial guidance and will provide update in later year as visibility improves. GS GBM

Trade/Tariffs: US

• US President Trump said they have a lot of countries wanting to make a deal and noted that the tariff situation is a good situation, while he added it is very important to pass the big beautiful bill. Trump also stated that he respects Canada and Mexico but they cheat on trade, and noted that China is manipulating its currency to offset tariffs and he thinks China will make a deal at some point and wants to make a deal. Furthermore, Trump confirmed the 104% tariff on China takes effect from midnight (EDT) and said he will be announcing tariffs on pharmaceuticals soon.
• US President Trump said they are taking USD 2bln in a day from tariffs and are doing well on tailored tariff deals, while he added that Japanese officials are flying to the US to make a deal and so are South Korean officials. Furthermore, he reiterated that tariffs are on and that they have tariffs on cars, lumber and steel.
• White House Press Secretary said President Trump has tasked US Treasury Secretary and USTR Greer to lead talks and deals will be made if they benefit American workers and address trade deficits, while she said President Trump met with the trade team on Tuesday morning and directed the team to have tailor-made trade deals with every country that contacts the administration to strike a deal. Furthermore, she said reciprocal tariffs will continue to go into effect as deals are negotiated and all options are on the table for each country, as well as stated that phones have been ringing "off the hook" from nations trying to negotiate a trade deal.
• At least a dozen House Republicans are considering signing onto Rep. Don Bacon's bill to restrict the White House's ability to impose tariffs unilaterally, according to Axios.

A more detailed look at global markets courtesy of Newsquawk

APAC stocks were mostly lower following the dead cat bounce on Wall St and as reciprocal tariffs took effect overnight including a total 104% tariff on China. ASX 200 was dragged lower by underperformance in health care and miners with the former pressured after US President Trump stated that he will be announcing tariffs on pharmaceuticals soon. Nikkei 225 spearheaded the declines in Asia and fell beneath the USD 32,000 level amid currency strength and ongoing tariff woes with a report noting that tariffs could potentially reduce Japanese companies' earnings by up to 10%. Hang Seng and Shanghai Comp were mixed as the Hong Kong benchmark conformed to the losses in the region, while the mainland traded indecisively and was somewhat cushioned following recent stabilisation measures and expected policy support.

Top Asian News

• Chinese monetary and fiscal stimulus are unlikely to fully protect the Chinese economy from the severe downturn in global demand caused by tariffs, according to Reuters sources
• PBoC has asked major state banks to reduce USD purchases, according to Reuters sources; PBoC will not resort to immediate sharp CNY deprecation to counteract the impact from US tariffs PBoC asked state banks to without USD purchases for proprietary accounts, and ask state banks to strengthen checks executive orders for clients. Chinese state banks were seen selling USD and buying CNY aggressively to slow the pace of CNY declines in the onshore spot market on Wednesday.
• Japan top currency Diplomat Mimumra says three party talks were held in response to US tariffs, discussed unstable moves in financial markets; agreed to do the upmost to maintain stability in global markets Exchanging information with G7, Asian nations and the IMF Watching moves with a high sense of urgency The first step would be to work to remove these US tariffs Cooperation needs to be international given global impact Have been having various discussions with the US treasury Important for currencies to move in a stable manner reflecting fundamentals Current moves are very volatile, alarmed over the moves including those driven by speculators No comment on daily FX moves Market seems concerned about the risks of inflation and recession in the US Japan needs to negotiate with US without being either optimistic or pessimistic.
• Goldman Sachs said continued tariff escalation between the US and China presents a downside risk to its current 2025 full-year real GDP forecast of 4.5% for China, while it noted significant policy easing by the Chinese government in the coming months is to mitigate the impact and stabilise growth.
• BoJ Governor Ueda said they have been raising rates up till now on the view that keeping rates low for too long when the economy and prices are recovering, risks causing economic excesses and would force them to hike rates rapidly later. Ueda said they have been raising rates with a focus on underlying inflation, which is gradually heading towards 2% and noted that uncertainty surrounding domestic and overseas economies is heightening due to US tariffs.
• South Korea announced emergency measures for the auto industry hit by US tariffs in which it is to lower taxes on auto purchases and raise EV subsidies to boost domestic demand, while it raised policy financing support for automakers to KRW 15tln this year from KRW 13tln and vowed efforts to ensure that domestic automakers are not treated in a disadvantageous way.
• Fitch Downgrades Alibaba (9988 HK/BABA) and Tencent (0700 HK) to 'A', Tencent Music (TME) to 'A-', Following Sovereign Action

European bourses (STOXX 600 -3%) are entirely in the red, but off worst levels after sentiment improved around the European cash open which coincided with commentary from China’s Foreign Ministry, which avoided announcing any fresh retaliation to Trump's latest tariffs. European sectors are in negative territory, but display a more improved picture than opening levels. Healthcare is by far the clear laggard as markets digest the latest commentary from US President Trump who said that he will be announcing tariffs on pharmaceuticals soon. Energy is also amongst the underperformers, as underlying oil prices remain pressured.

Top European News

• UK Chancellor Reeves is to hold tariffs crisis talks with top city executives, according to Sky News.
• Germany's CDU/CSU and SPD parties reached an agreement on a coalition, according to NTV; meeting this morning, aim to have a full agreement around midday Berlin time.
• EZ growth to take a bigger hit from US President Trump tariffs than ECB had earlier estimated, according to Reuters citing sources; initial ECB estimate of 50bps hit to growth in first year under revision A source estimates a growth hit in excess of 100bps in the first year.
• ECB's Escriva says US tariffs will have an impact on economic activity in Spain and other countries, "for now I will not talk about a recession"; one of the consequences could be the impact on business confidence and spending, its hard to measure Bank of Spain will have to revise down growth projections in Spain Any forecast is subject to high uncertainty The ECB will need to evaluate the new scenario regarding the impact of US tariffs on inflation There could be downward and upward impacts on inflation Depending on the impact, will have to take different actions.
• ECB's Knot says in the long term, a trade war is a negative supply shock; impact of the trade war is likely inflationary in the long term Risk is that we move to a supply-demand situation like in 2022; need to be vigilant on inflation. Disinflation is well on track. Rates are at the upper end of neutral range. So far, market functioning has been preserved. Reversal of bond markets needs to be monitored.
• ECB's Villeroy says estimates that a trade war will lower EZ growth by 0.25pp in 2025 Shock will not be negligible but will not be a recession. ECB monitors the financial system to ensure there is enough liquidity during times of market stress.
• ECB's Rehn says downside risks have materialised since the March meeting; case for continuing rate cuts at April meeting is supported by downside risks materialising Inflation appears to be stabilising at target and growth outlook has further weakened as result of the trade war. Large tariff increases will boost inflation in the US, but the effect in the EZ can be two-way. Overall, however, the effects of EZ inflation are apparently modest.
• German corporate tax to be lowered from 2028, according to Handelsblatt citing CDU head in internal meeting.
• Morgan Stanley expects the BoE to lower interest rates at every meeting until November; taking yr-end rate to 3.25% (currently 4.5%) vs. prev. forecast of 3.5%.

FX

• USD is softer across the board as trade war tensions continue to ratchet up as reciprocal tariffs alongside the 104% levy on China came into effect. In response, China's Foreign Ministry defended the nation's right to development and vowed to continue to take resolute and effective measures to safeguard legitimate interests. On the domestic agenda, FOMC minutes are due for release later. DXY ventured as low as 101.91 but failed to test the YTD trough at 101.26; has since stabilised above the 102 mark.
• EUR remains underpinned vs. the USD with ING noting "The euro remains in a good position to benefit from any USD confidence crisis, being the second most liquid currency in the world and a preferred alternative to the dollar for FX reserves". Reuters sources have reported that the ECB says EZ growth is to take a bigger hit from US President Trump tariffs than earlier estimated; initial ECB estimate of 50bps hit to growth in first year under revision. EUR/USD has ventured as high as 1.1089.
• JPY is firmer vs. the broadly softer USD and underpinned by its safe haven status. There have been several updates out of Japan with overnight remarks from BoJ Governor Ueda who reiterated that the central bank remains open to further rate hikes if Japan’s economic recovery continues as projected. Thereafter, Japan's top currency Diplomat Mimumra stated that three party talks were held in response to US tariffs, discussed unstable moves in financial markets and agreed to do the upmost to maintain stability in global markets. USD/JPY has delved as low as 144.56 but stopped shy of the April 4th YTD low at 144.54.
• GBP is firmer vs. USD but to a lesser extent than peers. UK newsflow remains less prominent than elsewhere. However, UK Chancellor Reeves is to hold tariffs crisis talks with top city executives, according to Sky News. Cable is currently stuck between its 50 and 200DMAs at 1.2743 and 1.2812 respectively. UK PM Starmer is due to make remarks at 11:00BST.
• Antipodeans are both firmer vs. the USD but less to for NZD following the RBNZ rate decision which saw the central bank cut the OCR by 25bps to 3.50% (as unanimously forecast) and signalled further cuts ahead. AUD/USD is higher following recent Chinese stabilisation measures and expected policy support. Albeit, as a note of caution, China appears to remain resolute in pushing back against the US' trade practices.

Fixed Income

• Overnight action saw USTs slump to a 110-01 trough with downside of over a full point at worst. The pullback in USTs began after a weak 3yr note auction, the results showed a slump in direct bidders, a soft cover and an elevated tail. Also driving the move was the ramping up of trade tensions, as Trump made clear that the reciprocal tariffs would (and since have) be coming into effect. The European session has seen US paper clamber off lows, as the risk tone improves a touch - potentially as China avoided announcing any fresh retaliatory measures to the latest Trump tariffs. Given all this, the next litmus test for the market in the absence of a tariff/trade driver will be tonight’s 10yr Note auction; an auction which intersects Fed’s Barkin (2027 Voter) and the Minutes from March’s meeting.
• Bunds initially posted gains of around 30 ticks, in sharp contrast to USTs and feeds into the argument that the US benchmark’s haven status has been tarnished somewhat, as discussed above. Thereafter, a bout of significant pressure was seen around 07:00BST, where Bunds fell from 130.30 to the 129.13 trough - the move came alongside a slight pick up in the risk tone. This reversed soon after, and then Bunds took another leg higher after a Reuters source piece that the ECB is looking to revise its first-year tariff growth hit from the initially thought 50bps.
• Gilts gapped lower by around 40 ticks before extending to post downside of 104 ticks, notching a 91.08 WTD base. Newsflow for the UK has been very light as we await an update from the PM/Cabinet, with Chancellor Reeves set to hold crisis talks with business leaders and Starmer scheduled to speak with the press at around 11:00BST. Most recently, the DMO tapped GBP 4.5bln of its 2030 Gilt, results featured an elevated tail but the cover was still near-enough 3x even given a slightly lower accompanying yield.
• UK sells GBP 4.5bln 4.375% 2030 Gilt: b/c 2.95x (prev. 3.39x), average yield 4.142% (prev. 4.311%) & tail 1.0bps (prev. 0.3bps)

Crude

• Crude is on a very weak footing, with Brent Jun'25 currently down by around USD 1.80/bbl. The complex remains pressured amid the broader risk-off mood and with a surprise draw in headline crude stockpiles unable to boost prices. Brent Jun'25 has been traded sideways throughout the European morning in a current USD 60.13-61.53/bbl range.
• Precious metals are broadly in the green; Spot gold is currently higher by around USD 61/oz and trading towards the upper end of a USD 2,970.12-3,052.29/oz range, owing to its haven status.
• Mixed trade across base metal futures with the complex indecisive as it reacts to Trump's tariffs coupled with hopes of Chinese stimulus to counteract the effect of the levies. 3M LME copper is subdued within a USD 8,461.67-8,728.00/t range awaiting further trade updates.
• US Private Inventory Data (bbls): Crude -1.1mln (exp. +1.4mln), Distillate -1.8mln (exp. +0.3mln), Gasoline +0.2mln (exp. -1.5mln), Cushing +0.6mln.
• CPC says it has resumed Black sea operations at two moorings.
• Reliance Industries is shutting one crude unit and some secondary units at the Jamnagar refinery (660k BPD) for 21 days, via Reuters citing sources.

Geopolitics

• Israeli army reportedly blew up residential buildings northwest of the city of Rafah in the southern Gaza Strip, according to a correspondent cited by Al Jazeera.
• Hezbollah official said they are ready to discuss the future of their arsenal if Israel withdraws and ends strikes.
• North Korea said its status as a nuclear weapon state can never be reversed, according to KCNA.

US Event calendar

• 7:00 am: Apr 4 MBA Mortgage Applications, prior -1.6%
• 10:00 am: Feb F Wholesale Inventories MoM, est. 0.4%, prior 0.3%
• 2:00 pm: Mar 19 FOMC Meeting Minutes

Central Bank speakers

• 11:00 am: Fed’s Barkin Speaks to Economic Club of Washington DC
• 2:00 pm: FOMC Meeting Minutes

DB's Jim Reid concludes the overnight wrap

The market turmoil has shown no sign of letting up over the last 24 hours, with the S&P 500 (-1.57%) edging increasingly close to bear market territory, having now shed -18.9% since its peak in mid-February. Moreover, futures are still pointing towards further losses today, with those on the index down another -2.53%, which if realised would take us over the bear market line. Perhaps even more alarmingly, US Treasury markets are also experiencing an incredibly aggressive selloff as we go to press, adding to the evidence that they’re losing their traditional haven status. That’s been particularly evident at the long end of the curve, with the 30yr yield up another +19.3bps this morning to 4.96%, having already risen by +35.6bps over the previous two sessions (the fastest move higher since March 2020). So there’s no sign yet that the market is managing to successfully find a bottom, and it feels like no asset class has been spared as investors continue to price in a growing probability of a US recession.

It had been a very different story at the open, as hopes for negotiated deals initially saw the S&P 500 surge by more than +4%. However, several triggers drove a sharp turn lower in market sentiment as the day went on. First, we had confirmation from US officials that the additional 50% tariff that Trump threatened China with on Monday would be imposed, dashing any remaining hopes for a last minute extension before the deadline. These reciprocal tariffs have now gone into effect as of 5am London time, meaning that the total China tariff now stands at 104%, with overall US tariffs now at their highest level since the early 20th century. In the meantime, there was little let up in Trump’s tone on tariffs last night, with the President saying that “we’re going to be announcing very shortly a major tariff on pharmaceuticals”.

Second, yesterday saw a weak 3yr Treasury auction, which exacerbated fears about how much demand there still was for the asset. They were issued 2.4bps above the pre-sale yield as the bid-to-cover ratio fell to its lowest in six months. So that helped contribute to a huge selloff among longer-dated bonds, and this morning the 10yr yield is up another +16.7bps to 4.46%. Given the scale of the rout, that’s raising questions about whether the Federal Reserve might need to respond to stabilise market conditions, and we can even see from fed funds futures that markets are pricing a growing probability of an emergency cut, just as we saw during the Covid turmoil and the height of the GFC in 2008.

Third, another story in the background has been a sharp weakening in the offshore yuan, which fell to its lowest level in history against the dollar, raising concerns that China could resort to competitive currency devaluation in response to US tariffs. So it’s exacerbating fears that the US and China could end up in an escalatory spiral that opens up further downside risks. That saw it decline to 7.43 per dollar, though it has since recovered to 7.38 overnight. Interestingly, equity indices in mainland China are the one positive performer overnight, with the CSI 300 (+0.32%) and the Shanghai Comp (+0.24%) both rising slightly. Elsewhere however, the overnight performance has been dire, with the Nikkei (-4.11%) slumping back after its rally the previous day, along with the KOSPI (-1.76%), the S&P/ASX 200 (-1.83%). Futures are all pointing that way as well, with those on the German DAX slumping -3.88%, whilst those on the S&P 500 are down -2.53%.

Taking a historic view, the -18.9% decline in the S&P 500 means it’s now becoming one of the bigger selloffs of recent history. Indeed, yesterday it surpassed the 2015-16 decline (-18.3%), which was driven by fears of a hard landing in China, a US growth slowdown, and the start of Fed hikes. The next threshold in recent times would be the late-2018 selloff, when the index fell -19.8% (also amidst Fed rate hikes and a growth slowdown, alongside trade tensions). And currently, futures are suggesting the index would be -21.0% lower, meaning it would overtake that selloff if realised. However, there’s still further to go before we get to the scale of the 2022 bear market (-25.4%), back when the Fed hiked aggressively to combat inflation and recession fears mounted. And we’re even further from the biggest fall of the last decade, which was the Covid shock, when the index fell -33.4% in little over a month.

In terms of the market reaction yesterday, there was little respite wherever you turned. The S&P 500 has now fallen -12.1% since the reciprocal tariff announcement, making it the biggest 4-day decline since March 2020, when the index saw a -17.2% drop as the world moved into lockdowns. It also saw a trading range above 5% for the fourth day running. In another sign of stress, the VIX index of volatility continued to mount, up +5.35pts to 52.33pts. Bear in mind the only other times it’s closed that high were during the Covid turmoil and the height of the GFC. Credit also remained under pressure, with US HY spreads widening another +4bps to 453bps, the highest they’ve been since June 2023. Otherwise, the selloff meant oil prices continued to plummet as well, with Brent crude (-2.16%) falling to $62.82/bbl yesterday, and this morning it’s down another -4.09% lower this morning at $60.25, its lowest level in four years.

It feels like ancient history now, but at the US open yesterday, there had actually been a much more positive narrative that helped the S&P 500 surge more than +4%. That was in part thanks to various comments suggesting that trade deals might be reached with various other countries. For instance, President Trump himself posted that he had he’d spoken with the Acting President of South Korea, and that “we have the confines and probability of a great DEAL for both countries.” On top of that, he said “We are likewise dealing with many other countries, all of whom want to make a deal with the United States.” Similarly, Treasury Secretary Bessent said on CNBC that if US trading partners “come to the table with solid proposals, I think we can end up with some good deals”. So that further added to hopes that Trump would negotiate the tariffs down over time.

Indeed, before we had that selloff later in the US, European assets had seen a much better performance yesterday, as markets closed before the evening selloff. So by the close, the STOXX 600 (+2.72%) had put in a strong rebound, posting its best daily performance since November 2022. Likewise for rates, the moves in the 10yr were comparatively steady, with those on 10yr bunds (+1.8bps) only seeing a modest increase, whilst those on 10yr OATs (-0.9bps) and BTPs (-0.9bps) fell back slightly. At the same time, 10yr gilts (-1.3bps) also saw a decline in yields, but the 30yr yield (+2.7bps) continued to move higher, closing at 5.35%.

Finally on the data side, we also got the NFIB’s small business optimism index for March yesterday, which contained growing evidence that the tariff impact was having an effect. It was conducted before the reciprocal tariff announcement, but concern was already mounting given the moves on Canada, Mexico and China, and we’ve seen other confidence surveys take a hit as a result. This one was no different, and the main index fell by more than expected to 97.4 (vs. 99.0 expected), in what also marked the biggest monthly decline since June 2022, back when inflation was still well above target and the Fed were hiking rates aggressively. Notably, there was also a sharp dip in the proportion saying they expected the economy to improve, falling back to a net +21%, having been at +37% in February. Indeed, it was the sharpest monthly drop since December 2020.

To the day ahead now, and the main things to look out for will be on the central bank side, including the minutes from the FOMC’s March meeting. Otherwise, we’ll hear from BoJ Governor Ueda, the ECB’s Knot, Villeroy and Cipollone, and the Fed’s Barkin.