What a difference a day makes, European stocks have bounced at the start of the new quarter and indices are a sea of green. The Eurotosxx 600 index is higher by 1%, eroding some of Monday’s losses. There are some big gains for European auto makers and in the pharma sector, after Astra Zeneca reported strong results from its cholesterol drug trail.
Markets look beyond tariffs
The focus is on the US reciprocal tariff announcement that is due tomorrow. At this stage, hopes are that a recovery rally could take hold if Trump’s tariff announcements are seen as the final move from the White House in its trade war, and if the new levies are reasonably easy to comply with. The downside risk for stocks could emerge once more if Trump suggests that even more tariffs could be coming down the line or if there is a lack of clarity about reciprocal tariffs in the announcement. Markets are hoping for a clean decision, that allows traders to move on from tariffs.
Markets are still jittery, and we think that investors will mostly refrain from taking big directional bets ahead of tomorrow’s tariff announcement, so we could see range bound price action for most asset classes today.
EUR/USD being held back by rate cut hopes
The euro is in focus as we wait for the CPI release later this morning. There is a battle of the wills going on between ECB members and financial markets. Yesterday a report emerged saying that ECB members are contemplating a pause at its meeting this month, having cut interest rates by 150bps so far in this monetary policy cycle. However, the interest rate futures markets is still pricing in a 71% chance of a rate cut on April 17th.
So, why the disconnect? Traders are convinced that reciprocal tariffs will hammer the EU and force the ECB to cut rates sharply. Even though tariffs could be extremely disruptive for European economies, it will take a long time to know the effects of tariffs and to see if they weigh on growth in the way that the market expects them to. Thus, the ECB may pause this month as the economic outlook is complicated by tariffs. A 70% chance of a rate cut looks overdone, and it could be weighing on the euro. If we see the market come back in line with ECB expectations, then the euro may stage another rally. EUR/USD backed away from attempting $1.10 in mid-March and is now hovering around $1.08. It may take a further reduction in rate cut expectations for this month to boost the euro back towards $1.10 in the near term.
Gold is pushing higher once again, and it is up by nearly $10 at the time of writing, at $3,133, a new record high. Until we get clarity on the reciprocal tariffs from the US, then it is hard to see the gold price faltering from here. Gold has been a consistent trade in the age of Trump and tariffs, and it remains an attractive asset in the current environment. What happens to gold after tomorrow’s tariff announcement is worth noting. However, there is a chance that the shine could come off gold in the near term, as investors buy the rumour and sell the fact.
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