US reverses course on reciprocal tariffs amid market turmoil

Written by

Fabien Yip

Market Analyst

Timeline of the US-China trade conflict escalation

The trade tension between the US and China has dramatically intensified in recent months, with a rapid succession of tariffs and counter-tariffs. Understanding this timeline is crucial for traders and investors navigating the current market volatility.

• 4 February: US imposed 10% additional tariff on Chinese goods
• 7 February: Temporary tariff exemption for Chinese goods worth less than $800
• 10 February: China hit back with 15% tariff on US coal and liquefied natural gas exports plus 10% levy on oil and agricultural equipment, and expanded their blacklist of US entities
• 4 March: US doubled tariff on Chinese goods to 20%
• 10 March: China imposed 10% additional tariff on US soybeans, and introduced 10%-15% tariffs on agricultural imports including beef, cotton, and pork
• 2 April: Trump unveiled the latest reciprocal tariff policy hitting all Chinese imports with an extra 34% starting 9 April and cancelling the exemption for goods worth less than $800 starting 2 May
• 4 April: China announced a restriction of rare earth export and 34% retaliation tariff on all US goods effective 10 April
• 9 April: In response to Beijing's countermeasures, US slapped on an additional 50% tariffs, taking the blanket rate on all Chinese goods to a jaw-dropping 104%
• 9 April at 7:00 pm Hong Kong time: China increased the retaliation tariff on all US goods from 34% to 84%, effective 10 April
• 10 April at 3:00 am Hong Kong time: Trump announced a 90-day pause on reciprocal tariffs for 56 nations, but raised China's tariffs to 125% in response to their latest retaliation

Market reaction to tariff developments

Financial markets experienced extreme volatility as the trade conflict intensified. US Treasury bonds saw one of their most turbulent trading sessions in history, with 30-year Treasury yields surging close to 40 basis points before the reciprocal tariffs took effect.

The sudden reversal in policy appears attributable to the collapse of all major US assets including stocks, dollar and bonds in a short period of time. In addition to concerns of foreign investor selling, there were suspicions that some hedge funds had been caught in the recent turmoil.

Following Trump's announcement of the 90-day pause, all major US stock indices rebounded dramatically. Treasury yields declined and the stock volatility index plummeted. Safe-haven currencies like the Japanese Yen and Swiss Franc dropped, while the Australian Dollar recovered from its five-year low. Asian stocks are expected to rise significantly in response to the announcement, though the selective nature of the pause created uncertainty about how markets would respond over the longer term.

Figure 1: Big swings in US treasury yields

Figure 2: One-day price movements of major asset classes

Outlook: is the market sell-off over?

While the announcement provided temporary relief, the markets aren't necessarily out of the woods yet. Several key uncertainties remain that could dramatically change the picture in the coming weeks.

The unresolved situation with China presents the most immediate concern. With tariffs now at a staggering 125%, the impact on global supply chains and inflation could be substantial. Additionally, the fact that the general tariff pause is only for 90 days rather than a complete rollback creates ongoing uncertainty.

According to Bloomberg Economics research, the higher reciprocal tariff rate on Chinese imports and other restrictive measures already in effect will likely drag US GDP down by close to 2% and increase inflation by one percentage point. This economic impact could potentially trigger further market volatility.

Technical analysis

Technical charts show the US Tech 100 Index found support from the January 2024 low, rebounding sharply to 19,000. The relative strength index (RSI) has reverted to a neutral level, suggesting the immediate selling pressure has subsided.

A sustainable reversal of the prevailing downtrend appears unlikely in the medium term without a decisive break above the 200-day simple moving average. Material resistance is expected around 20,400, which could limit further gains unless there's a significant improvement in trade relations.

Figure 3: IG US Tech 100 index (daily) price chart

The US 500 presents a similar technical picture, having found support at 4,808, slightly above the January 2024 low. The index is hovering around its 20-day simple moving average and is likely to face resistance around 5,670, a local peak seen in the recent rebound and in August 2024.

For traders looking to navigate these volatile markets, utilising trading signals could help identify potential entry and exit points during this period of uncertainty.

Figure 4: IG US 500 index (daily) price chart

How to trade market volatility during trade wars

When facing market uncertainty driven by trade tensions, developing a robust trading plan is essential. Market volatility can present both risks and opportunities for traders who are properly prepared.

Start by thoroughly researching which sectors and assets are most vulnerable to tariff impacts. Technology, manufacturing, and consumer goods companies with global supply chains typically face the greatest exposure to trade disruptions.

Open an account with a reliable provider offering a range of markets and risk management tools. Ensure the platform provides robust charting capabilities and news feeds to keep you informed of policy developments.

Search for markets that either benefit from or are insulated from trade tensions. During previous trade wars, defensive sectors like utilities and certain commodities have often shown resilience.

Place your trades with appropriate risk management strategies, including stop losses and position sizing that reflect the heightened volatility. Consider reducing your usual position size during particularly uncertain periods.