Lid on Trade War Uncertainty: Can Trump’s Exemptions Revive US Markets?
President Donald Trump has added a layer of unpredictability to his ongoing trade war, recently announcing exemptions for certain consumer electronics and crucial tech components from his “reciprocal tariffs.” This move is expected to provide a short-term boost to the stock market, particularly benefiting US tech companies. However, the bond and currency markets may remain less receptive, as they are increasingly showing signs of de-dollarization, which poses long-term risks for US assets.
Trump’s Stock Market Surge: Will It Last?
Historically, Trump has shown the ability to spark major rallies in US stocks, and these tariff exemptions could fuel further market gains. On Wednesday, US stock indexes saw substantial growth following Trump’s announcement of a 90-day pause on some of his tariffs, although the rate for China was still increased. This announcement helped recover part of the $6 trillion in market cap that was wiped out after the “Liberation Day” tariff declaration, which initially stunned investors worldwide.
Adding to the market momentum, the US Customs and Border Protection issued guidance on Friday evening, exempting several vital imports like smartphones, computers, semiconductors, and chip-making equipment. These exemptions are expected to lift stock prices further, especially for tech investors, with Wedbush analyst Dan Ives describing the move as “the best possible news for tech investors,” significantly easing concerns within the sector.
Bond and Currency Markets Face Uncertainty
Despite the stock market’s optimism, the bond and currency markets have shown more skepticism. Recent sell-offs in the US dollar and Treasury bonds indicate that while short-term stock traders may respond positively to tariff breaks, long-term investors in bonds and currencies remain wary. Trump’s tariff pause helped lower Treasury yields temporarily, but they resumed their upward trajectory later in the week, signaling continued concerns in the bond market.
The shift away from the US dollar has been noticeable, with former Treasury Secretary Larry Summers comparing US bonds to those of emerging markets. He warned that such behavior signals a loss of confidence in US assets, as global investors increasingly seek alternatives to the dollar. George Saravelos, Global Head of FX Research at Deutsche Bank, pointed out that the market is actively de-dollarizing, which could have profound implications on the long-term stability of the US financial system. According to Saravelos, this de-dollarization process is accelerating faster than anticipated, raising concerns about the orderly nature of the transition.
The Bigger Picture: De-dollarization and Its Consequences
The ongoing shift away from US assets is not a new development but is being amplified by the current geopolitical and economic climate. As US assets are sold off, investors are less inclined to hoard dollar liquidity, leading to increased volatility. The situation highlights a deeper trend in global finance: a growing lack of trust in the stability of US economic policies, particularly under Trump’s leadership. The consequences of this shift could have far-reaching implications for the global financial system, especially if the de-dollarization trend continues to accelerate.
Conclusion: What’s Next for US Markets?
While Trump’s moves have had an immediate positive impact on the stock market, they haven’t been enough to assuage concerns in the bond and currency markets. The growing de-dollarization trend suggests that investors may be losing confidence in the long-term stability of US assets. As global investors seek safer alternatives, it remains to be seen how the US financial markets will adapt to these changing dynamics. The ongoing tug-of-war between short-term stock market gains and long-term bond and currency market risks is likely to remain a defining feature of the financial landscape in the months to come.
