Time is ticking, but the tariff war remains unclear with Donald Trump suddenly declaring that he does not plan to talk to Xi Jinping this week, and adding that China is “stealing” from the U.S. In short, there is still no trade deal in sight between the two world powers, which is not good news for markets.
At the same time, the US rejected Japan's request to lift tariffs altogether, a move that did not please investors either. As a result, both the Nasdaq and the S&P 500 started the week in the red, a fairly expected reaction. Who knows, we may see another rally in Treasury yields if the deal fails.
In recent weeks, however, markets have followed a similar pattern: an initial wave of pessimism followed by a rebound. Some see this as reminiscent of the Biden era. The problem is that back then, investors were pinning their hopes on the next interest rate cut, which now seems less likely as inflation risks increase.
Can the “buy the dips” approach last?
Let's start by remembering that past performance does not guarantee future results. Therefore, expecting the rally to continue just because it has happened in the past is a risky bet. Moreover, analysts don't seem too confident that recent gains will be sustained, as trade wars have already hurt the economy.
It's not just the drop in GDP in the first quarter, caused mainly by a widening trade deficit due to increased imports by businesses before tariffs went into effect, but the fact that the U.S. consumer confidence index fell to 86.0 in April from 93.9 previously. The current situation index also fell to 133.5 from 134.4.
Plus, the U.S. S&P Global Composite PMI index fell to 50.6 in April from 53.5 in March, its lowest reading since September 2023. Business expectations fell to their lowest level in two and a half years, and employment numbers were virtually flat. Not surprisingly, XAUUSD is returning to an uptrend.
All of this increasingly points to a slowdown in the economic cycle, and worse, it may be accompanied by a pickup in inflation due to tariffs. This would likely push the Fed to adopt a more aggressive monetary policy. In the short term, this should raise doubts about current market valuations.
One more thing: macroeconomic uncertainty makes it difficult for companies to provide clear guidance. Take Tesla, for example. In its latest earnings report, the company declined to give a full-year outlook, saying it would wait until second-quarter results to update investors, and money doesn't like unknowns.
What's the bottom line? Keep your eyes open and be prepared for possible turnarounds.
This article was written by FL Contributors at www.forexlive.com. Read More Details
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