A few hours before Trump’s reversal on tariffs, the S&P 500 was flirting with a bear market. More importantly, the US was on the edge of emerging-market type crisis with bonds and dollars going down alongside the stock market.

While President Trump might not care about the stock market in the short run, it seems that the threat of a bond market crisis made him think again.

The announcement of a 90-days pause of some of his “reciprocal” tariffs on the globe triggered one of the biggest single day stock market rallies ever. US Treasuries bond yields also felt some relief.

It now seems that an Armageddon scenario of a full-blown bear market has been avoided – at least for now.

Investors started the day trying to understand the risks of the “basis trade unwinding” by some multi-billion-dollar hedge funds. A few hours later, they had to handle the biggest rally for the Dow Jones in 5 years. While the “Trump pause” is a relief for investors, the technical damage is real and most likely prevent any V-shape rebound for risk assets in the short run. 

The same level of uncertainty prevails for the corporate world. For CEOs and CFOs, the level of economic uncertainty has rarely been so high. At this stage, it is impossible for them to make any plans about capex, hiring, or M&As. This will have consequences on the job market and global economic growth.

It should also be noted that despite the reversal by Trump, the tariff estimates from the 2 April has not changed considerably, sitting at around $490bn today. The reason for this is that China’s expected increase with the latest tariff rate is $275bn higher than what was released last week and offsets the $158bn of tariff reduction announced yesterday (estimates by Strategas). The US will thus have to deal with the equivalent of the biggest tax hike over the last 50 years. While this could be neutralised by corporate and individual tax cuts, the spillover effects on the US economy remain difficult to predict.

Even after yesterday’s flip-flop, we’re still looking at the biggest tariffs since the 1930s.

In a matter of hours, the Trump administration’s stance has evolved from an all-out trade war against everyone, to a concentrated trade war against China. Indeed, the 125% tariff on China while all the others drop to the 10% baseline for the next 90 days demonstrate that all of this is about China. Over the last few decades, there was a strong geopolitical equilibrium: China was exporting cheap goods to the US (keeping inflation low) and was recycling their dollars into US Treasuries (keeping yields low). This equilibrium was already cracking and is now broken for good, with neither side having any political incentive to restore it.

This is bad news for China. The numbers don't lie: China's $300B trade surplus with the US is about to become their biggest weakness. The death of US-China trade will likely mean a hit of between -1% and -2% for China’s GDP (source: Gavekal). Beijing will now have to step on the gas to compensate for this loss, which has already begun.

The US will also be hit hard, as their manufacturing industry is more reliant on China than vice-versa.