By Benjamin Picton of Rabobank
The Signal And The Noise
US stocks rallied sharply yesterday following an unexpectedly strong services PMI report and comments from Donald Trump suggesting that reciprocal tariffs due to take effect next week may be somewhat watered down. Trump said that he “may give a lot of countries breaks” as he would be “embarrassed” to charge the USA’s trading partners tariff rates commensurate to the barriers that US exporters face to access those markets. However, it DOES seem to be the case that a ‘Dirty 15’ countries running persistent large trade surpluses with the United States will be targeted.
The NASDAQ rose 2.27%, the S&P500 closed up 1.76% and the DOW finished 1.42% higher. European stocks struggled, as did the Nikkei, but both Hong Kong and mainland China indexes closed higher. US 10-year Treasury yields rose by almost 9bps to 4.34%, and 2-year yields we’re also up by almost 9bps to 4.04%.
Bloomberg reports comments from a unnamed White House official that sectoral tariffs (tariffs levied by product group) that had also been slated to take effect on April 2nd may now be delayed. That represents a possible short-term reprieve for autos, pharmaceuticals, lumber, copper and agriculture – which have all been nominated as likely targets for tariffs – but there is still a great deal of uncertainty about what will be announced and some of these sectors may end up having duties applied to them next week.
In another major announcement yesterday President Trump said that 25% tariffs would be applied to any country importing Venezuelan oil and the Treasury Department informed Chevron that a license for operating in Venezuela would only be extended until the end of May. Trump said that these duties would apply on top of any existing tariffs, so importers like China – who has already been stung with 20% tariffs since Trump took office – could face average duty rates of 45% or more.
China, India, Malaysia and Western Europe are all major importers of Venezuelan crude, and Gulf Coast refineries could be impacted by reduced availability of heavy crude as a result of export restrictions. Brent closed 1.16% higher at $73/bbl while the active WTI contract climbed 1.22% to $69.11/bbl.
While tariff noise captured many of the headlines overnight, there was also a curious incident whereby the Editor-in-Chief of the Atlantic magazine reported that he was mistakenly added to a private Signal group chat where plans for US strikes on the Houthis in Yemen were discussed. Participants in the chat appear to include Defence Secretary Pete Hegseth, Vice President J.D. Vance, Secretary of State Marco Rubio, Treasury Secretary Scott Bessent and National Security Advisor Mike Waltz (among others).
Even more interesting than the fact that classified national security discussions were apparently held amongst senior officials via a commercial messaging app (with a journalist along for the ride) is the content of the discussions themselves. The ‘JD Vance’ account noted that “3% of US trade runs through the Suez. 40% of European trade does” and went on to say “I just hate bailing Europe out again” while adding “if there are things we can do upfront to minimize risk to Saudi oil facilities we should do it”. The Pete Hegseth account responded “I fully share your loathing of European free-loading. It’s PATHETIC.”
Participants openly discussed the United States being the only naval power “on our side of the ledger” capable of ensuring freedom of navigation through the Red Sea region. A participant speculated to be White House Deputy Chief of Staff Stephen Miller added “we soon make clear to Egypt and Europe what we expect in return. We also need to figure out how to enforce such a requirement. EG, if Europe doesn’t remunerate, then what? If the US successfully restores freedom of navigation at great cost there needs to be some further economic gain extracted in return.”
All of this is quite extraordinary, but also quite revealing of the Trump Administration’s thinking on relations with allies and partners. Nothing better highlights the transactional nature of this presidency than the raw geopolitical calculus of cabinet members discussing the need for Europe to be made to pay costs for ensuring the free flow of trade through the Suez Canal. This added trade pressure comes at a time when European industry is already losing competitiveness against American rivals, as we explore here.
As mentioned in this Daily yesterday, European officials are already sweating on whether they can rely on the United States to provide Dollar liquidity via Fed swap lines in a crisis. The logical response to this kind of uncertainty is for developed market central banks to be forced into holding more substantial foreign currency reserves, as developing market central banks typically do.
That means more bids for US Treasury securities, and another way in which the US grand strategy of holding borrowing costs low while safeguarding the global role of the Dollar, narrowing the trade deficit and rebuilding US industrial capacity to ensure hard power supremacy vis-à-vis China could play out.
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