Trump Blinks, Stocks Rebound Despite Worsening Bond Market Liquidity

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Hakyung Kim and Pia Singh of CNBC report Dow jumps 600 points Friday, capping one of the most volatile weeks on Wall Street ever:

Stocks climbed Friday as Wall Street wrapped up a historically wild week.

The S&P 500 advanced 1.81% to end at 5,363.36. The Dow Jones Industrial Average rose 619.05 points, or 1.56%, and closed at 40,212.71. The Nasdaq Composite climbed 2.06% to settle at 16,724.46.

Stocks took a leg higher Friday afternoon on comments from the White House that President Donald Trump is “optimistic” China will seek a deal with the U.S.

This week has been one of the most volatile periods on record for Wall Street. The major averages tumbled Thursday as traders went into risk-off mode, with trade policy uncertainty weighing on sentiment. Stocks lost a chunk of the historic gains seen on Wednesday after Trump announced a 90-day reprieve on some of his high “reciprocal” tariffs.

The S&P 500 fell 3.46% on Thursday, while the 30-stock Dow tumbled 1,014.79 points, or 2.5%. The tech-heavy Nasdaq ended the day lower by 4.31%. On Wednesday, the S&P 500 rallied 9.52% for its third-largest gain in a single day since World War II, while the 30-stock Dow skyrocketed more than 2,900 points.


The CBOE Volatility Index, known as the Vix, earlier in the week spiked above 50 before dropping to about 37 as of Friday afternoon.

The Trump Administration has opted for a universal tariff rate of 10% — except for China. Goods from Beijing will see a rate of 145%, a White House official confirmed to CNBC on Thursday.

China on Friday retaliated by raising its levies on U.S. products to 125% from 84%. “Even if the U.S. continues to impose higher tariffs, it will no longer make economic sense and will become a joke in the history of world economy,” the Chinese finance ministry said in a statement, according to a CNBC translation.

Meanwhile, the European Union said its trade representative was flying to Washington on Sunday to “try and sign deals.”

“We remain in the early innings of this global trade regime change, and while the 90-day pause on reciprocal tariffs temporarily reversed the market selloff, it does prolong uncertainty,” Wells Fargo Investment Institute president Darrell Cronk wrote in a note on Friday.

Here are the U.S. tariffs currently in place:

  • 145% duty on all goods from China
  •  25% tariffs targeting aluminum, autos and goods from Canada and Mexico not under the United States-Mexico-Canada Agreement 
  • 10% levy on all other imports

Despite the tumultuous week, the three major averages notched solid gains in the period. The S&P 500 posted a 5.7% advance for its best week since November 2023. The Nasdaq rose 7.3% during the week for its best performance since November 2022. The Dow gained nearly 5% over the week.

To be sure, the major averages remain sharply lower since April 2, when the White House announced so-called reciprocal tariffs on goods from other countries. Since then, the S&P 500 is down more than 5%.

The latest consumer sentiment numbers for April came in worse than expected. The expected inflation level also surged to its highest level since 1981, according to the University of Michigan survey on consumers  

A tumultuous week indeed, it's Friday and it was another insanely volatile week.

A friend of mine remarked: "It's crazy that one guy can move the US stock market like a yo-yo." 

This is how wacky things have gotten, algos, traders and investors all hanging on to every post President Trump puts on his social media platform, Truth Social.

Things are so chaotic, it reminds me a bit of Trump 1.0 when I met up with a trader who worked for Izzy Englander's Millennium hedge fund and he was telling me back then they had algos tracking everything Trump tweeted about. 

I'm paraphrasing but he said something like this to me: "Everything Trump tweets about comes true, we are using his tweets to adjust our trades accordingly in real time."

Whatever! If you ask me, most investors are fed up of Trump's posts and probably miss "sleepy Joe Biden."

Before I get to Trump's obsession with tariffs, how they recklessly rolled out these tariffs, and how he needs to walk them all back, let me quickly discuss the action on Wednesday as it was a major reversal.

In his weekly market wrap-up, Not Out of The Woods But...,  Martin Roberge of Canaccord Genuity writes:

Thanks to a 9.5% surge on Wednesday (the third biggest daily gain post-WWII) after President Trump announced a 90-day pause on the reciprocal tariff rate for most countries, the S&P 500 is up ~5% for the week. Investors’ nervousness remains, however, as concerns appear to be shifting from tariffs to the US$ and the bond market which seem to have lost their safe-haven attributes. Growth, inflation, and deficit concerns are such that foreign investors’ confidence on US assets is waning. Also, whether this is a retaliation move or not, market speculation is circulating that the two biggest holders of US Treasuries, Japan and China, have been liquidating positions. In the case of Japan, it is not speculation since it sold ¥2.6T worth of foreign bonds (likely US Treasuries) last week, the third-largest weekly sale over the last 10 years. If it is proven that China is also using this financial weapon, the White House and the Federal Reserve will have to get their act together as they may have to implement a yield curve control to cap US Treasury bond yields. In fact, this could be what gold is sniffing, surging ~$200/oz this week.

Our focus this week is on Wednesday’s jump of 9.5% on the S&P 500. Obviously, such a rally could mark the end of the ongoing correction/bear market. We cannot rule out this scenario since we are likely past peak tariff and peak retaliation risk, in our view. Also, investors could argue that financial markets have finally found the Trump-Bessent put around -20% on the S&P 500 and 4.5% on 10Y Treasury bond yields. That being said, our Chart of the Week shows the average trajectory around the Top-10 daily returns on the S&P 500 with the April 9 close rebased to 100. Here are some key observations. First, the rebound from the April 8th low (4,983) could take the S&P 500 all the way up to the ~5,500 region. Thereafter, a retest of the April 8 low would be likely. Indeed, while not shown by the pattern, we note that in 7 out of the 10 occurrences, the S&P 500 retested and broke below the starting point of the rally over the following six months. Then, if history is any guide, the S&P 500 would put in a sustained bottom in July/August. In all, while the 90-day pause on reciprocal tariffs comes as good news for the stock market, our analysis of the biggest historical 1-day surge on the S&P 500 suggests that a market bottom is a volatile process with high odds that the S&P 500 retests its April 8 low and possibly makes new lows. Encouragingly, however, the confirmation that Washington is sensitive to financial markets is such that a severe bear market like in 2000-02 and 2008-09 has become a much lower probability, in our view.

Is Martin Roberge right, will the S&P 500 retest its April 8th low sometime in July/ August and possibly go lower?

The answer is nobody knows, it all depends on policy uncertainty and whether Trump walks back the tariffs in a meaningful way. 

One thing is for sure, it will be volatile until markets get a firm sense of what is happening with tariffs, whether or not the US economy slips into a recession and whether long-term inflation expectations start rising significantly. 

There are a lot of moving parts here but I believe it's safe to assume we have reached peak policy uncertainty:

Of course, with Trump you never know, he keeps digging in his heels on tariffs and has an obvious beef with China.

Apart from peak policy uncertainty, there may be another reason to be bullish here, sentiment is so depressed as American consumer sentiment has dropped to the second lowest level since 1952 (pandemic was slightly worst):

Typically you want to buy stocks when everyone is depressed, anxious, worried about losing their job and savings.

However, it can get worse if unemployment starts soaring along with inflation, so it's hardly a given that sentiment can't deteriorate further.

On top of consumer sentiment, there's also international investor sentiment which seems to be factoring in here.

Lots of talk this week how sovereigns led by Japan and China are selling US Treasuries which is why you saw yields spike and the US dollar tumble:

Typically when US long bond yields go up (because of strong growth), the US dollar rallies but this isn't he case now, yields spiked because of policy uncertainty, raising the term premium.

 Are foreign central banks and institutional investors really selling Treasuries and US assets?

And what are they buying? More gold?

I don't know, a week or two doesn't make a long-term trend but clearly the bond market got wacky this week and scared Trump into announcing a 90-day pause in tariffs with a baseline tariff of 10% for almost all countries except China (Canada and Mexico are still subject to 25% tariffs on goods that don’t comply with the U.S.-Mexico-Canada Agreement).

In fact, the bond market selloff was 'severe' as long-term yields notched their biggest week since 1982:

The bond market sell-off escalated Friday to cap off one of the most volatile and unusual trading weeks in recent memory as President Trump's tariff whipsaw sent yields surging and investors fled safe haven assets.

Long-term Treasury yields skyrocketed, with the 10-year yield (^TNX) surging to its highest level since February to trade as high as 4.59%, a massive 72 basis point swing from Monday's low of 3.87%. Shortly after the closing bell, yields pulled back to around 4.49%.

According to data compiled by Yahoo Finance, the 10-year has logged its biggest week since November 2001.

Similarly, the 30-year yield (^TYX) jumped 3 basis points to trade near 4.88% — the highest level since January but the biggest weekly surge for the 30-year yield since 1982.

According to the FT, liquidity has worsened in the $29tn Treasury market as volatility soars:

“There is real pressure across the globe to sell Treasuries and corporate bonds if you are a foreign holder,” said Peter Tchir, head of US macro strategy at Academy Securities. “There is a real global concern that they don’t know where Trump is going.” 

 “We are concerned because the movements you see point to something else other than a normal sell-off,” said a European bank executive in prime services, a division that facilitates leveraged trading for firms including proprietary traders and hedge funds. “They point to a complete loss of faith in the strongest bond market in the world.” 

Traders said poor liquidity — the ease with which investors can buy and sell Treasuries without moving prices — was exacerbating market moves. 

Analysts at JPMorgan said market depth, a measure of the market’s ability to absorb large trades without significant shifts in price, had significantly worsened this week, meaning even small trades were moving yields significantly.

All this bond market volatility makes investors very nervous.

Will the Fed be forced to intervene? Too soon to jump to that conclusion.

Lastly, and more problematic, why is President Trump so dead set on tariffs and why did he take out the sledgehammer to coerce deals?

Perhaps because he knows he doesn't have much time to reset global trade according to his vision so he's in a rush to show Americans this is the right course of action.

But the approach has been so reckless, so wrong on so many levels that he risks throwing the US economy into a recession and risks wiping out the Republican majority in the House when midterms roll around in two years.

Trump's obsession with tariffs is baffling and it’s frightening that he refuses to see how this is the biggest policy error since Smoot-Hawley.

Equally disturbing when Treasury Secretary Scott Bessent says ‘it’s Main Street’s turn’ after Wall Street grew wealthy for 4 decades or when trade advisor Peter Navarro says the stock market plunge is 'no big deal'.

What planet do these people live on? Bessent knows a crisis on Wall Street will  hit Main Street hard and Navarro who apparently has a PhD in Economics from Harvard needs to brush up on his macro to see how confidence drives everything and stocks plunging because of erratic trade policies  is very much a big deal.

Alright, let me wrap it up there, here are this week's top-performing sectors and large cap stocks:


 

It was quite a week, one that many traders and investors will never forget.

Below, Neel Kashkari, Federal Reserve Bank of Minneapolis president and CEO, joins 'Squawk Box' to discuss how Kashkari is feeling about the economy, what's happening in the 'financial plumbing', and the most recent CPI data.

Next, Krishna Guha, Evercore ISI vice chairman, joins 'Closing Bell Overtime' to talk what the dollar sinking and bond yields rising signals about global markets.

Third, Subadra Rajappa, Societe Generale head of US rates strategy, joins 'Fast Money' to talk worrying trends in the U.S. bond market.

Fourth, Mark Newton, Fundstrat global head of technical strategy, joins 'Squawk Box' to discuss if there's been underlying damage done to equity markets in recent days, what to expect from market performance, and much more.

Fifth, Tom Lee, Fundstrat, joins 'Closing Bell' to discuss the market consolidation, whether this is a market to get into and where he expects to see stock rebound.

Sixth, Larry Fink, BlackRock chairman and CEO, joins CNBC's 'Squawk on the Street' to discuss how he's thinking about US recession odds, trade relations, and more.

Seventh, PMorgan Chase Chairman and CEO Jamie Dimon talks tariffs, the future of US trade and competition, earnings expectations, recession likelihood and more in an exclusive interview on Fox 'Mornings with Maria'.

Lastly, Trump "buckled" when the markets looked bad but maintains "the full on trade war" with China which will ultimately "bleed" American industry, says economist and former Minister of Finance in Greece Yanis Varoufakis.

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