Depending on one’s view, a turbulent week might be characterized as truly worrying or one that signalled the end of erratic and unorthodox policymaking. Equities staged a seemingly confident rally on Friday, which pushed US stocks into positive territory, whilst global markets, although below the previous Friday’s settlement prices, finished the latest 5-day period well above Monday’s troughs. Oil, taking its cue partly from equities and partly from growing anxiety of potential supply disruptions as the US-Iran nuclear negotiations get underway, closed slightly lower but the relatively mundane weekly changes disguise a range of $9/bbl with settlement prices encouragingly above the weekly lows.

Should much be read into the recovery from the bottoms? The pessimist will argue that the rally experienced on Friday is nothing but a false dawn. She would point to the dollar, gold, and US bonds. These are all traditionally safe havens, and yet, what was observed was that the dollar index settled under 100 for the first time since July 2023. Gold, playing its role as a solid choice of sanctuary, settled at a record high. Its ratio to the US crude oil benchmark ballooned to above 52, whilst at the beginning of the second Trump administration, one ounce of gold only bought you 35 barrels of WTI.

The most worrying aspect of last week’s performances, however, was the relentless rise in US bond yields. The 10-year bond, which is deemed the ultimate risk-free investment tool when everything else fails, rose to 4.5%, up from 3.9% the previous Friday. Not even during the 2007-2008 financial crisis, which also originated in the US, was such an unprecedented and ominous move detected. Global equities lost 60% of their value 18 years ago, but the 10-year bond yield fell from 5.3% to 2.0%. It cannot be stressed hard enough how important an indicator the US bond market is as Treasury bonds are the backbone of global finance, used as collaterals in myriads of financial transactions, they impact interest rates, and exchange rates, and provide financial stability globally. When the trust in it, and by extension in the US government, is shaken, the repercussions could potentially be unimaginably severe.

The other camp would counter that the message sent from bond investors was noted and received by the administration. Those in the inner circle who possess the macroeconomic ‘know-how’ in policymaking gained the upper hand over those who only have the macroeconomic ‘don’t-know-how’ - hence last Wednesday’s shock reversal to pause the April 2 tariffs for 90 days except the blanket 10% punitive rates, which were left in place. One might go as far as to say that the message from the markets is getting through, and consequently, the situation is not expected to worsen but get brighter as bilateral trade talks start. Last week’s tacit admission of the harmful impact of high import taxes might also incentivize US trading partners to drive a hard bargain when negotiating trade barriers.

The puzzle of changes in US trade policies is far from complete without the most salient jigsaw, China. Just think of the fact that the world’s two biggest economies are responsible for more than 50% of the total economic output, and when these juggernauts are taxing each other well over 100% the economic consequences can and will be catastrophic. China is unlikely to back down as the ruling party will not be ousted because of its hardball stance with its adversary whilst a significant jump in US inflation or economic contraction could lead to voter dissatisfaction and result in Republican losses of biblical proportion in the next midterm elections. The unsustainability of 145% of tariffs on Chinese goods was implicitly acknowledged over the weekend. Smartphones and other electronic goods, such as routers, chip-making equipment and computers were exempted from President Trump’s reciprocal tariffs in a sign that the White House intends to dial back on punitive measures. The market reaction has hardly been more than tepid. Oil is a tad higher, bond yields are unchanged, the dollar remains under pressure and US stock futures are retreating from the early morning jump as President Trump rushed to reassure markets that these exemptions would be temporary.

The situation remains fluid, and the trade war is liable for capricious twists and turns. Whatever the next few weeks and months bring, one cannot help but draw a parallel between the consequences of Russia’s invasion of Ukraine and the trade policies of the US administration. In both cases, wars broke out; with Russia, it was military, and with the US, economic. Both entailed a massive loss of confidence. Traditional buyers of Russian energy have been working around the clock for the past three years to become independent from Russian oil and gas. The same tendency is being noticed this time around. Governments from South America to Asia, and Europe are keen to sign new, mutually beneficial trading agreements whilst admitting that, given the size and the importance of the US market, they will never be able to fully circumvent the world’s biggest economy.

Perhaps the biggest difference between the Ukrainian war and the US’s attempt to re-write the global trade order from the economic perspective is that Russian energy flows were simply re-aligned as willing buyers from China and India emerged. The picture is more blurred in global trade. In case the US is willing to cool the high temperature, it will fail to deliver on its campaign promise to bring manufacturing back home and will be unable to replace government revenues from lower taxes with import tariffs, a kind of Liz Truss moment. A protracted trade tension will maintain the threat of rising inflation, recession, or stagflation. Bilateral deals with allies, but continuous hostility with China, will force the latter to re-direct its exports away from the US, but it will find fewer willing partners than Russia did with its energy exports. It looks as though the damage has been done and credibility lost in 100 days. Even if some calm is restored, long-term global growth prospects have irrevocably suffered, together with trade, economic, and political relationships, and with all the inevitable consequences for oil demand.

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