Markets soar as Trump backs down

Donald Trump backed off on reciprocal tariff measures mid-week, giving most countries a 90-day pause in the trade war, with border levies introduced on imported goods over the last few weeks lowered to 10%. The 25% rate for all aluminium, steel, and cars entering the US remains.

The news sent equity markets soaring around the world, with US stocks having one of their best days in history. The S&P 500 jumped 9.5% in one day, an amount that would be regarded as good over an entire year.

China was isolated and tariffs were raised against the nation’s goods again after it chose to retaliate against Mr Trump’s tariff plans. Beijing now faces a 145% levy on some of its goods imported to the US. On Friday, Beijing raised tariffs on US goods to 125% but said it would not go higher.

The US president’s capitulation followed days of turmoil in equity, bond and commodity markets and fears grew that the US administration’s trade war could tip the world into recession. His universal 10% levy for all countries, except China, remains in place, as does the 25% rate for all aluminium, steel, and cars entering the US. With Mr Trump also threatening to raise tariffs on pharmaceutical imports earlier in the week, the trade issues remain far from over.

In UK equities, the performance was more subdued. The FTSE 100 was down 2.1% over the week by mid-session on Friday, with the more UK-focused FTSE 250 flat.

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Trump tariffs

Donald Trump climbed down from his extreme tariff position on Wednesday following days of market turmoil. Mr Trump said countries that were subjected to reciprocal tariffs would see the rate go back down to 10% to allow for trade negotiations.

Last Friday, China announced retaliatory tariffs of 34% on US imports in response to the US tariff announced. Washington retaliated by raising tariffs on Chinese goods to 104%. China responded in a tit-for-tat manner raising tariffs on US goods imported into China to 84%. China's foreign ministry insisted the country will "fight to the end" against the tariffs if compelled and accused the White House of "bullying practices". Finally, Mr Trump raised tariffs on Chinese goods to 125% (with some goods at 145% as a previous 20% tariff remained) resulting in Beijing raising tariffs on US goods to 125%.

The change in stance followed concerns that US Treasury bonds could lose their status as a “safe haven” investment. A sell-off in US bonds resulted in the 10-year US Treasury yield breaching 4.5% on Wednesday, before settling back down. Yields rise when the price of bonds falls. Earlier in the week, the yield was less than 3.9%. This could be a sign that investors were losing confidence in US sovereign debt, as well as shifting into cash. There was also speculation that several countries, including China, were dumping US Treasuries as part of a retaliatory response to the tariffs. Low Treasury yields is a key policy aim of the Trump administration. Speculation mounted that the Federal Reserve may have to step in and buy Treasury bonds to support the market – a move reminiscent of the Bank of England's emergency action in 2022 following Liz Truss's mini-Budget.

Shares in pharmaceutical companies fell after Mr Trump reiterated plans for a "major" tariff on all pharmaceutical imports in a speech at a Republican Party dinner early in the week. Medicines had previously been exempted from tariffs. Mr Trump did not indicate the size of the tariffs or when they would be introduced but the comment represented a change in stance. Mr Trump has said the tariffs will incentivise drug companies to move their operations to the US.

Carmakers are holding thousands of vehicles at US ports and temporarily halting shipments to delay the entry of their products into the US. One carmaker representative, quoted in the Financial Times, said that the stockpiling of vehicles at American ports could get “quite ugly”, with ports set to “fill up fast” in a few weeks if US tariffs are not softened. Tariffs compound problems for carmakers. The 25% tariff on auto imports remains.

India's central bank downgraded the country’s growth forecasts and has cut interest rates following the introduction of a 27% tariff on goods exported to the US. The Reserve Bank of India (RBI) also shifted its monetary policy stance to "accommodative" from "neutral", which means that the central bank would be more open to cutting rates in the future.

Taiwan is among the first nations entering into tariff negotiations with the US, President Lai Ching-te says. Washington slapped Taiwan with a 32% reciprocal tariff rate before the 90-day pause brought it down to the 10% baseline.

Geopolitics

The UK government announced a further £450m of military support to Kyiv, as the UK and Germany prepare to host a meeting of 50 nations in Brussels. Defence officials are meeting to "pile pressure" on Russian President Vladimir Putin and force him to end his invasion of Ukraine, UK Defence Secretary John Healey said. "We must step up to deter Russian aggression by continuing to bolster Ukraine's defences.”

The package includes funding for hundreds of thousands of drones, anti-tanks mines and repairs to military vehicles. Germany’s Friedrich Merz reached a deal to form a coalition government with the Social Democrats (SPD) bringing the conservative leader closer to the chancellery in Europe’s largest democracy. The agreement is yet to be approved by SPD members.

Economics

There was some good news for Chancellor Rachel Reeves. The UK economy unexpectedly grew by 0.5% in February – a rate five times larger than a consensus view of 0.1% for expansion of the country’s gross domestic product in February. January’s figure of a fall of 0.1% was also revised up to 0.0% growth. Subdued UK growth ahead.

Inflation in the US also eased more than expected. The consumer price index fell a seasonally adjusted 0.1% in March, putting the 12-month inflation rate at 2.4%, down from 2.8% in February. Excluding food and energy, so-called core inflation the Federal Reserve watches more closely, ran at a 2.8% annual rate, having increased 0.1% for the month. That was the lowest rate for core inflation since March 2021.

The minutes of the last meeting of the US Federal Reserve showed that central bank officials believe that downside risks to employment and economic growth and upside risks to inflation have increased. Some bank officials said that high uncertainty has the potential to reduce consumer spending, business employment and investment activity.

Companies

Tesco expects to make lower profits this year amid a potential price war among the UK's major supermarkets. The UK's biggest grocer has forecast profits of between £2.7bn and £3bn compared with the £3.1bn it made for the financial year that has just ended. Chief executive Ken Murphy said the lower profit prediction would give Tesco the "flexibility and the fire power to maintain our position in the market" due to the increased competition.

Energy giant Shell on Monday cut its first quarter liquefied natural gas (LNG) production outlook, blaming cyclones and unplanned maintenance in Australia. First-quarter results are released on 2 May. Management now expects LNG output of 6.4 million to 6.8 million metric tonnes, down from its previous guidance of 6.6 million to 7.2 million. Shell also said it expects to book a $100m exploration well write-off.

Over-50s travel and insurer Saga posted a jump in annual earnings, but warned profits will be weaker in the current year as it would be “one of transition”. The company is preparing for the sale of its insurance underwriting business and a new partnership arrangement with Ageas. A material increase in financing costs was highlighted as the main reason.

GP surgeries owner Assura accepted a £1.6bn takeover offer from investment firms Kohlberg Kravis Roberts (KKR) and Stonepeak Partners. The NHS landlord, which owns and manages over 600 properties in the UK, has been the subject of a bidding war. The latest proposal values each Assura share at 49.4p, a 32% premium to the company's closing share price on the last business day prior to the offer period starting. Assura's investors will receive a 0.84p per share dividend and 48.56p in cash for every share they hold.