Treasuries, US dollar see fall as Trump's trade war sparks recession fears

The latest escalation in the trade war between the United States and China rattled global markets again on Wednesday, with Treasuries and the US dollar falling in a selloff of some US assets. 

US stocks edged higher in early New York trading, however, led by a more than 1 per cent rise in the Nasdaq and with technology leading gains among S&P 500 sectors. 

US President Donald Trump's eye-watering 104 per cent tariffs on China came into effect on Wednesday, prompting a swift retaliation from Beijing in the form of duties of 84 per cent on US imports.

 

US Treasuries saw fresh selling pressure Wednesday in a sign that investors were dumping their safest assets and heading for cash. 

 

The violent selloff in Treasuries was reminiscent for some of the dash-for-cash at the onset of the COVID-19 pandemic in March 2020, and it reignited fears of fragility in the world’s biggest bond market. 

Many investors worry that Trump's wide-ranging tariffs will be severe enough to trigger a recession and force the Federal Reserve into cutting interest rates, and so they dumped their Treasury holdings, driving up yields as bond prices dropped. 

The seemingly wholesale push out of Treasuries and the dollar - effectively the backbone of the global financial system - could be symptomatic of a broader loss in investor desire to hold US assets in general and "the end of an era", according to Deutsche Bank head of foreign exchange research George Saravelos. 

"We are witnessing a simultaneous collapse in the price of all US assets including equities, the dollar versus alternative reserve FX and the bond market. We are entering uncharted territory in the global financial system," he said. 

The dollar - often a safe haven in times of turmoil - fell broadly, while investors fled to the Swiss franc and gold. 

"This seemingly 'sell America' trade is one that's now dominating the rising recession risk theme that typically would have pushed yields down," economists at ING said. 

The dollar index, which measures the greenback against a basket of currencies including the yen and the euro, fell 0.5 per cent to 102.26, with the euro up 0.78 per cent at $1.1037. 

Against the Japanese yen, the dollar weakened 0.98 per cent to 144.84. 

Against the Swiss franc, the dollar weakened 1.01 per cent to 0.839. Spot gold rose 3.03 per cent to $3,074.35 an ounce. 

The yield on benchmark US 10-year notes rose 12.4 basis points to 4.384 per cent, from 4.26 per cent late on Tuesday. 

Potentially adding to the pressure on Treasuries was an auction of new 10-year notes later on Wednesday - hot on the heels of a weak three-year sale the day before - that could prove a crucial litmus test of investor appetite for US government debt.

 

US stock rise early 

US stocks were in positive territory early, with investors weighing whether recent sharp selling may have been overdone, although trading remained choppy as it has been all week. 

As of Tuesday's close, S&P 500 companies had lost $5.8 trillion in stock market value since Trump's tariff announcement late last Wednesday, the deepest four-day loss since the benchmark was created in the 1950s, according to LSEG data. 

The Cboe Volatility index, Wall Street's fear gauge, was down. This week, it had reached to its highest since August. 

The Dow Jones Industrial Average rose 65.18 points, or 0.18 per cent, to 37,710.77, the S&P 500 rose 20.39 points, or 0.42 per cent, to 5,003.55 and the Nasdaq Composite rose 180.63 points, or 1.18 per cent, to 15,448.54. 

MSCI's gauge of stocks across the globe fell 1.90 points, or 0.26 per cent, to 741.06. The pan-European STOXX 600 index fell 2.97 per cent.

 

Analysts at JPMorgan believed the rapid escalation in US tariffs on China would be sufficiently disruptive to push the global economy into recession.

 

"Given the import bill from China, the China tariff alone amounts to a whopping $400 billion tax hike on US households and businesses," they said in a note to clients.  "The currency is likely to be a release valve for China policymakers." Oil prices tumbled as concern over the outlook for global energy demand outweighed any nervousness on the geopolitical front. 

US crude fell 3.83 per cent to $57.30 a barrel and Brent fell to $60.51 per barrel, down 3.68 per cent on the day.  (Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)