Renewed anxieties surrounding potential tariffs, long anticipated by market participants, materialized on Wednesday as investors braced themselves for U.S. President Donald Trump’s impending announcement regarding automotive levies. The tech-heavy Nasdaq Composite registered its most significant two-week decline, falling by 2%, while the broader MSCI World index also retreated by 1%. This market unease coincided with British finance minister Rachel Reeves’ delivery of an updated assessment on the UK’s fiscal and economic health, a report that painted a challenging picture for the pound sterling and UK government bonds. A confluence of factors, including rising inflation expectations and geopolitical uncertainties, contributed to the risk-off sentiment prevailing across global markets.
The specter of tariffs, a familiar source of apprehension for Wall Street and global markets, returned with force on Wednesday. Investors braced for U.S. President Donald Trump’s latest pronouncements on auto tariffs, triggering a wave of selling pressure across asset classes.
The Nasdaq Composite bore the brunt of the market’s jitters, tumbling 2% – its largest drop in a fortnight. The MSCI World index followed suit, shedding 1% amidst growing concerns over potential trade barriers. Earlier in the day, across the Atlantic, British finance minister Rachel Reeves presented an updated snapshot of the UK’s fiscal and economic landscape. As will be explored further, her assessment painted a precarious outlook for both sterling and UK sovereign debt.
Today’s Key Market Movements:
- Wall Street concluded the trading day in a sea of red, with the Nasdaq leading the decline with a 2% fall. Technology stocks were the worst performers within the S&P 500, registering a 2.5% loss. Renewed fears of tariffs and persistent inflation also weighed heavily on consumer discretionary stocks, which dropped by 1.7%.
- Several prominent technology giants were among the hardest-hit individual stocks, including Super Micro Computer (-9%), Nvidia (-5.7%), and Tesla (-5.6%).
- Sterling experienced the most significant movement among G10 currencies, depreciating by 0.5% against the U.S. dollar following the release of weaker-than-anticipated UK inflation data.
- Crude oil prices reached a three-week peak, propelled by U.S. inventory figures and escalating concerns regarding tightening global supply. Crude futures advanced by approximately 1%, marking their fifth increase in the last six trading sessions.
- The prevailing risk-averse sentiment exerted downward pressure on emerging market currencies across the board. Investors in Brazil also grappled with increasing political uncertainty after the Supreme Court announced that former President Jair Bolsonaro would face trial for an alleged coup attempt.
“Tariff Man” Flexes Muscles, Markets Cower
“We’re going to go with the tariffs on cars,” President Trump declared on Wednesday, foreshadowing the official announcement scheduled later in the Oval Office.
This statement served as a stark reminder that the self-proclaimed “Tariff Man” is not merely posturing, or at least appears to be serious about his trade agenda. Should he proceed with these and other tariffs, such as the reciprocal measures reportedly planned for April 2nd, investors face the unwelcome prospect of accelerated inflation coupled with decelerated economic growth.
With the April 2nd deadline drawing near and the end of the quarter on the horizon, investors may opt to reduce their risk exposure and adopt a more defensive stance. This would be a logical reaction given the prevailing climate of economic and policy uncertainty.
Following a series of surprisingly high U.S. consumer inflation expectations surveys, it was the turn of UK consumers on Wednesday. A survey conducted by Citi/YouGov revealed that the public’s inflation expectations had risen to 4.2%, the highest level in two and a half years.
While consumer inflation expectations are often considered an unreliable predictor of actual inflation outcomes, policymakers cannot afford to disregard them entirely. On Wednesday, Bank of Japan Governor Kazuo Ueda reiterated the central bank’s readiness to raise interest rates if necessary to prevent rising food prices from triggering broader inflationary pressures.
Minneapolis Fed President Neel Kashkari adopted a more cautious tone, suggesting that the conflicting forces of weak growth and elevated inflation warrant the Federal Reserve maintaining its current policy stance for the time being.
The detrimental impact of tariffs and trade disputes on equity markets is becoming increasingly evident. Preliminary indications from the limited number of U.S. companies that have reported first-quarter results reveal a sharp decline in earnings per share growth. Adding to the concerns, Barclays became the latest brokerage to lower its year-end target for the S&P 500 on Wednesday.
Meanwhile, British finance minister Rachel Reeves attributed the deteriorating growth outlook to pervasive global uncertainty. The independent fiscal watchdog significantly reduced its 2025 GDP growth forecast to a mere 1%. This increasingly challenging environment poses significant headwinds for holders of UK assets.
Sterling May Be Vulnerable to Foreigners’ Gilt Trip
The central message delivered by British finance minister Rachel Reeves on Wednesday was unambiguous: the challenges confronting UK policymakers are escalating, and their room for maneuver is rapidly diminishing.
The UK’s spring fiscal update underscored the nation’s bleak growth prospects for the current year and the persistent need to increase public borrowing.
This situation raises the possibility that investors may begin demanding higher yields for lending to the government, or that the exchange rate may need to weaken to attract sufficient capital inflows. This, in turn, amplifies the risk of a weaker pound further fueling inflation, potentially creating a negative feedback loop.
Consequently, Reeves faces an exceptionally complex task in navigating the challenges facing sterling and the UK bond market.
SHORT-TERM REPRIEVE
Markets experienced a brief respite on Wednesday as the UK budget update included larger-than-anticipated spending cuts and slightly lower debt issuance plans than investors had anticipated. However, the underlying reality is that UK public finances will remain under considerable strain in the years ahead.
According to new forecasts from the independent Office for Budget Responsibility, government borrowing over the next five years is projected to be 47.6 billion pounds ($61.4 billion) higher than previously expected just five months ago.
Furthermore, there appears to be little prospect of growth coming to the rescue in the near term, as the OBR slashed its 2025 GDP growth forecast to a meager 1%.
Compounding these concerns are growing anxieties that UK inflation will edge closer to 4% later in the year, significantly above the Bank of England’s 2% target. Adding to the headwinds is the looming threat of tariffs from Washington and the potential for a broader global trade conflict.
Considering these factors collectively, the risks to growth in the coming years are skewed to the downside, with no guarantee that borrowing costs will decline commensurately.
KINDNESS OF STRANGERS
This backdrop hardly presents an appealing proposition for the overseas investors who play a crucial role in financing Britain’s persistent trade and budget deficits.
Official data reveals that foreign investors held 32% of the British government’s 2.08 trillion pound debt pile at the end of the third quarter of the previous year. This represents the largest share since 2009 and, excluding the Global Financial Crisis, the highest percentage on record.
While this might suggest that overseas investors are not overly concerned about Britain’s fiscal health, it also presents a vulnerability. Foreign investors are likely to be among the first to sell in the event of a significant shock or crisis, thus requiring an attractive premium to remain invested.
As former Bank of England Governor Mark Carney famously remarked in 2016, Britain relies heavily on “the kindness of strangers” for its funding. The gilt selloff in late 2022 served as a stark reminder that this “kindness” cannot be taken for granted.
Currently, holders of gilts are benefiting from the highest bond yields among the G7 group of countries, a reflection more of Britain’s challenging inflation and public debt dynamics than a positive growth outlook.
Vikram Aggarwal, a fixed income investment manager at Jupiter Asset Management, suggests that this indicates the gilt market is undervalued and presents an attractive buying opportunity. However, this perceived “cheapness” has persisted for an extended period, and the increasing burden of borrowing requirements on the market is becoming more pronounced.
“The deterioration in UK public finances can’t be underestimated,” Aggarwal stated on Wednesday.
Reeves will undoubtedly be acutely aware of this reality.
What Could Move Markets Tomorrow?
- Industrial and Commercial Bank of China results (full year 2024)
- U.S. GDP (Q4, final estimate)
- U.S. 7-year Treasury note auction
- U.S. weekly jobless claims
- Several U.S. Fed officials are scheduled to speak, including: Vice Chair for Supervision Michael Barr, Governor Michelle Bowman, Cleveland Fed President Beth Hammack, Philadelphia Fed President Patrick Harker, Richmond Fed President Thomas Barkin, and Kansas Fed President Jeffrey Schmid.
- British Prime Minister Keir Starmer is scheduled to meet with U.S. President Donald Trump in Washington.
For further reading on today’s market developments, here are a few recommended articles:
- Trump tariffs on Venezuela crude buyers are a potent new tool of US pressure
- Trump tariffs loom over Britain’s debt-laden economy
- FX markets still suspect Trump is bluffing: Mike Dolan
- ‘This is not the time to go it alone,’ NATO’s Rutte tells U.S. and Europe
- Brazil Supreme Court to put Bolsonaro on trial for alleged coup attempt
The opinions expressed are solely those of the author and do not reflect the views of Reuters News, which adheres to the Trust Principles of integrity, independence, and freedom from bias.