Moneycontrol Pro Panorama | Trump hangover kicks in

Trump's cowboy approach, particularly regarding tariffs, has unsettled the market.

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Euphoria over US President Donald Trump's election is fading as the US markets are struggling at critical points. The S&P 500 and the Nasdaq 100 are trading near their 200-day moving averages, a key indicator closely monitored by traders. When the market falls below its 200-day moving average, it typically signals a shift in trend.

Last week, the Nasdaq 100 closed below its 200-day moving average for the first time since March 2023. Meanwhile, the S&P 500 has been hovering around this level for almost a week for the first time since October 2023. Even an index that equally weights the Magnificent Seven mega-cap tech stocks—Nvidia, Apple, Alphabet, Meta Platforms, Amazon, Microsoft, and Tesla—is trading at its 200-day moving average.

Trump's cowboy approach, particularly regarding tariffs, has unsettled the market.

Even policymakers are uncertain about the implications of Trump's actions. One of the most concerning statements came from Federal Reserve Chair Jerome Powell, who indicated that the Fed is awaiting greater clarity on the impacts of the Trump administration's various policy changes on the economy.

Powell stated, “As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves. We do not need to be in a hurry, and are well positioned to wait for greater clarity."

However, the markets are not so forgiving. The S&P 500 is trading 6.5 percent lower than its peak in mid-February while the Nasdaq 100 is nearly 10 percent lower than its high. Both indices are now at levels last seen before the US election results were announced.

Powell's comments about a wait-and-watch approach contradict market expectations of a rate cut. Starting in June, traders have priced in the equivalent of three quarter-point reductions by the end of the year, according to the CME Group's FedWatch gauge.

Trump has placed the blame for the market decline on others. When asked if his tariffs contributed to the market's instability, he responded, "Well, many of them are globalist countries and companies that won't be doing as well. Because we're taking back things that have been taken from us many years ago."

"There'll always be a little short-term interruption," he said. "I don't think it's going to be big, but the countries and companies that have been ripping us aren't particularly happy with what I'm doing."

It is not just the US markets that have felt the impact of Trump's unpredictable actions. Last week, Japanese and German government bond yields experienced a sharp increase. Japan's 10-year yield reached its highest level since 2009 while Germany's 10-year Bund yield rose by approximately 28 basis points to 2.76 percent, a level not seen since October 2023.

The surge in Germany's bond market followed the government's announcement of a €500 billion ($540.18 billion) infrastructure fund and proposals to reform borrowing rules. Meanwhile, Japan's 10-year government bond yield surged above 1.5 percent, mirroring higher inflation and the upward trend in European bond yields. This synchronised movement highlights how global economic policies and market reactions are increasingly interconnected.

For Trump, rising yields in Japan and Germany are concerning, especially as US yields begin to fall. Economist Peter Schiff wrote on X, "The yield on the 10-year JGB just hit 1.5%. No one is paying attention to this slow-moving train wreck. With Powell's Bond yields moving up and the dollar falling, Treasuries will have a lot of competition. Rising bond yields will drive the US economy deeper into recession."

The outlook for the US economy has become more challenging as other developed countries vie for funds.

Rising yields in leading economies spell bad news for Indian and emerging markets. Investors are likely to shift their funds to low-risk, high-return markets. Given India's slowing economy and high tax rates, the country is currently low on the priority list for foreign investment. Recent Foreign Institutional Investor (FII) flows indicate that fewer foreign institutions are considering the Indian markets.

Unless the Indian government and organisations like SEBI proactively attract foreign capital back to India, our markets may continue to face pressure.

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Moneycontrol Pro