Risk appetite recovers as April 2 tariff deadline approaches

Equity markets are in better mood

Both US equity indices and the dollar continued their recovery yesterday, with euro/dollar falling below 1.08 for the first time since early March and the S&P 500 index testing the 5,800 level again. Despite these moves, the overall market sentiment remains fragile, as the countdown to the April 2 deadline has officially commenced.

Numerous reports for next week's so-called “Liberation Day” point to a less aggressive set of announcements from US President Trump. Polls among market participants forecast a 10% tariff on most countries, with China facing a substantially higher level, possibly as high as 50%. Both Canada and Mexico are better positioned compared to the European Union and could potentially face the lowest possible tariffs, but Trump remains unpredictable.

While most investors understand that Trump’s main target is China, a 50% tariff on Chinese imports could significantly disrupt the supply chain, potentially in a way comparable to the COVID period, which eventually led to an extraordinary spike in inflation rates. In this context, copper has already been drawn in the tariff talk, recording a new all-time high today.

US consumers under pressure

The result of these tariff expectations is that the US consumer is apparently becoming more skeptical about the future. After the recent weak University of Michigan Consumer Sentiment report, Tuesday’s Consumer Confidence index confirmed the continued loss of consumer spending appetite. This means that Friday’s detailed PCE report, which is the Fed’s preferred inflation measure, has gained prominence and has an increased chance of producing a downside surprise.

Today’s calendar is equally busy with numerous Fed speakers on the wires, most likely repeating the “patience” message. Interestingly, the February durable goods orders report will also be published. As discussed by Chair Powell at the recent Fed meeting, despite the worsening “soft data”, the Fed remains relatively confident about the outlook since the hard data are “pretty solid”. However, today’s data, along with Friday’s PCE report and next week’s key ISM survey figures and labour market data, could put a sizeable dent on the Fed’s confidence about the growth outlook.

UK inflation eases, focus shifts to the Budget update

The February inflation report was a welcome gift to BoE doves. Both the headline and core inflation figures decelerated to 2.8% and 3.5%, respectively, bringing smiles to the BoE halls and supporting the chances of a May rate cut. The pound has not taken lightly the lower inflation prints, though, losing ground against both the euro and the dollar.

The focus now shifts to the Budget update. At 12:30 GMT, and after the release of the updated OBR forecasts, which are likely to show a lower growth profile and higher borrowing needs, the Chancellor of the Exchequer will brief Parliament. Reeves is expected to avoid changing her fiscal rule and increasing taxes, and instead focus on spending cuts.

Reports point to significant cuts in welfare spending and a leaner public sector, which sounds similar to what Musk’s DOGE is implementing in the US. These new measures will probably be begrudgingly accepted by the majority of voters and most Labour MPs, who are already upset about the fiscal policy mix implemented by the Labour government.

Gold maintains gains; oil and bitcoin move higher

Despite the small steps recorded towards a ceasefire in the Ukraine-Russia conflict, gold remains in demand, trading comfortably above $3,000, as the April 2 deadline is fast approaching. Similarly, with Trump targeting Iran again, oil prices are flirting with the $70 level, and despite the OPEC+ alliance most likely deciding to go ahead with the May planned supply increase.

Finally, the crypto market is breathing easier these last few days. Boosted by an improvement in risk appetite, as US equity indices continue to recover, bitcoin is trading north of $88,000 and Ethereum has managed to climb above the $2,000 level again. On a monthly basis, the picture remains mixed, with both XRP and Cardano leading the rally.