The People’s Bank of China (PBOC) pegged the yuan’s midpoint rate at its weakest setting since September 11, 2023. This shift is an indication that uncertainty in the markets is rising. The yuan dropped to a record low of 7.3518 per dollar, its lowest since December 2007. This decline stands in stark contrast to President Donald Trump’s surprise announcement. He announced a 90-day moratorium on most of his new tariffs, a move that first sparked a wave of relief across global markets.
The recent plunge of the yuan made lots of global investors to fret. They’re still grappling with impacts of increased geopolitical tensions and macroeconomic stability. The relief rally following Trump’s announcement produced one of the biggest one day gains ever in all the big stock indices. The dollar was unable to sustain its sudden overnight advance against either the yen or the Swiss franc. It was down 0.7% to the yen and 0.6% to the Swiss franc. This drop signals a precarious position for U.S. assets against the backdraft of changing market dynamics.
Market analysts at the time described Trump’s timing for a tariff hold as a historic shift in his trade approach. The sudden gambit created a momentary wave of hopefulness. The sustained weakness of the yuan showed that traders were still on edge.
“I think the initial move was just massive short cover, and this has given the world a bit of a breathing space, except for China… because markets were starting to price in the worst-case scenario,” – Khoon Goh, head of Asia research at ANZ.
Thursday brought an undeniable relief rally to markets around the world. The Nikkei Index jumped just over 8%, and EUROSTOXX 50 futures and DAX – German stock exchange – futures were up about 8% each. In the UK, FTSE futures surged 5.4%. In further signs of recovery, the CSI300 blue-chip index gained almost 1%, and the Hang Seng Index jumped 2.2%. Yet, U.S. stock futures have stayed on the sidelines of this bullish break.
These are the structural issues that are weighing on the market, said Lawrence Gillum, chief fixed income strategist at LPL Financial.
“Sticky inflation, a patient (Federal Reserve), potential foreign buyer boycotts, hedge fund deleveraging, rebalancing out of bonds into cash, and an illiquid Treasury market are all reasons why Treasury yields continue to move higher.”
These mixed signals from the market have left investors unsure where to go next. The dust is far from settling from Trump’s tariff shocker. Market watchers expect that traders will require an adjustment period to reorient their trading strategies in a new regulatory regime.
“But now that the dust has settled, I think markets will seem to sort of figure out where to go from here,” – Khoon Goh.
Currency exchange rates have been extreme, with the ruble collapsing in 2022. However, some analysts continue to be bullish on the development of new trade routes from this situation. Wong Kok Hoong, head of equity sales trading at Maybank, provided a hopeful glimpse of what business might look like moving forward.
“The China + 1 supply chain route (is) still intact. As the rest of the world will be at workable 10% tariffs for 90 days, companies/businesses have time/alternatives to adjust supply chain routes,” – Wong Kok Hoong.
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