ORLANDO, Florida, April 3 (Reuters) -

TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Highest U.S. tariffs in over 100 years slam markets

On March 7, U.S. Treasury Scott Bessent said the U.S. economy

could be in for a "detox period" as it adjusted to President

Donald Trump's transformative policy agenda. The gyrations on

Wall Street and beyond on April 3 following Trump's sweeping

global tariffs the day before suggest that may be a huge

understatement.

U.S. stocks, the dollar and oil cratered on Thursday, bond

yields plunged and volatility soared, as Trump's tariffs at a

stroke darkened the near-term outlook for spending, investment,

corporate earnings, economic activity and growth.

Trump's tariffs on China are among the highest. Will Beijing

risk devaluing the yuan? See below for more, but first, a round

up of today's remarkable moves on world markets.

I'd love to hear from you, so please reach out to me with

comments at [email protected]. You can also

follow me at @ReutersJamie and @reutersjamie.bsky.social.

Today's Key Market Moves

* The S&P 500 tumbles 4.8%, the Dow 4%, the Nasdaq 6% and

the

Russell 2000 small cap index 6.6%.

* That's the worst day for the S&P 500, Dow and Russell 2000

since

June 2020, and the Nasdaq's steepest fall since March 2020.

* The "Magnificent Seven" group of Big Tech shares is back

in a

bear market. The Roundhill "Mag 7" ETF falls a record 6.9%,

taking its decline since December's peak to 25%.

* All 10 sectors in the S&P 500 close in the red, the

worst-performing sector being energy, down 7.5%. OPEC's output

boost adds to tariff fears, oil tumbles 7%.

* Apple shares slump 9.1%, the biggest fall since

the

pandemic, while Dell tumbles 19% and Nike shares fall 14.4%.

* The MSCI World index falls 3.4% for its biggest loss in

nearly

three years.

* The dollar index posts its biggest fall in over two years,

sliding 1.6%.

* U.S. Treasury yields fall across the board, led by a huge

decline of more than 20 bps at the short end, bull-steepening

the curve.

Trump is on fire, global markets tariffied

One should never read too much into a single day's trading in

financial markets, but some days are so dramatic it's difficult

not to. Thursday is one of them.

Declines of more than 4% on Wall Street and near-2% swings

in the dollar don't come around too often, and outside of major

crises like the Global Financial Crisis or the pandemic, they

are even rarer.

So it is a measure of investors' shock at the severity of

Trump's tariffs, trepidation over the damage they'll inflict -

and, no little disbelief at how they were calculated - that

markets gyrated as much as they did on Thursday.

Economist David Beckworth posted on social media platform X

that Trump's latest salvo in his global trade war may be "one of

the biggest unforced economic policy errors in US history" - a

bold claim, perhaps, but one which seems to be resonating.

Analysts are ratcheting down their U.S. growth forecasts,

and sub-1% expansion this year is now in view, while recession

risks have risen sharply. Rates traders are now pricing in

almost 100 basis points of Fed cuts this year and 150 bps by the

middle of next year.

As economist Rebecca Harding states, "nobody wins from the

trade war." It's a simple but important point - the economic and

market outlook everywhere is suddenly bleaker, especially in

some of the Asian countries that have been hit with the heaviest

duties.

What's more, policymakers find themselves in an even tighter

spot. Will the Bank of Japan be so keen to continue with its

rate-hiking campaign? Will the European Central Bank or Bank of

England be forced to cut rates more than planned if the euro and

sterling continue rising? And how does powerhouse China respond?

Part of the problem for everyone - investors, households,

businesses and policymakers - is Trump's propensity to change

course in the blink of an eye. Some tariffs may be lowered,

exempted, or postponed within days, should countries come to the

negotiating table and strike a deal with "Tariff Man".

Of course if they are maintained, or countries retaliate,

the economic and market outlook could darken even more, stoking

volatility and uncertainty - good for gold, bonds and short

sellers; not so good for stocks, credit and other risky assets.

If investors are hoping a sense of calm might descend on

markets on Friday, think again - the latest U.S. payrolls will

be released at 8:30 ET, and a few hours later Fed Chair Jerome

Powell delivers a speech on the economic outlook.

Stock futures around the world are pointing to heavy losses

at the open. Buckle up.

What next in world trade war? Watch the yuan

What's the most important exchange rate in the world right now?

Probably dollar/yuan.

How Beijing responds to the eye-popping tariffs the Trump

administration slapped on Chinese exports to the U.S. will be

critical not only for China, but also for its 'plus one' trading

partners in Asia, and world markets more broadly.

The total tariff rate on U.S. imported goods from China is

now a whopping 54%. If maintained for a reasonable length of

time, this will be a financial hit to Beijing that will likely

hinder its efforts to address its lingering real estate crisis,

boost consumption, build its military might, and fund its myriad

investments.

And, unlike in the first Trump trade war, China can't rely

on funneling exports and investment through 'plus one' countries

in Asia to mitigate the tariff shock because those nations have

also been hit with punitive levies. In some cases, like Vietnam,

the tariffs are even higher than China's.

That leaves currency devaluation as perhaps the most

powerful weapon China can wield as it looks to respond to

Washington's latest salvo. But unfortunately for Beijing, that

strategy is fraught with risk.

LIMITED ROOM TO MANEUVER

A rapid fall in the yuan's value could trigger huge capital

flight as international and domestic investors pull money out of

the country, slamming domestic asset prices and stoking

financial market volatility.

And beyond China's borders, a tumbling yuan could force

other Asian countries to let their currencies fall in order to

maintain competitiveness, potentially sparking a

'beggar-thy-neighbor' FX devaluation war, the last thing any of

them need.

Moreover, currency devaluation runs counter to the sweep of

reforms and stimulus measures Beijing has announced since

September, as it seeks to reflate the economy via domestic

consumption rather than exports.

And China's room for further policy stimulus is already

fading. Further interest rate cuts and liquidity provisions will

probably come, but a major fiscal boost will involve issuing

more bonds, which will strain an already widening budget

deficit.

Indeed, Fitch downgraded China's credit rating on Thursday

by one notch to 'A', citing a deterioration in the public

finances as Beijing scrambles to shore up tariff-hit growth.

"Everything now depends on China," says Robin Brooks, senior

fellow at the Brookings Institution, warning that a meaningful

devaluation of the yuan could begin a global 'risk-off' downward

spiral that could slam emerging markets and, if it persists,

tank the U.S. economy as well.

ALL EYES ON CHINA

Beijing has previously said it won't go down the FX

depreciation road, preferring to keep the yuan relatively

"stable". But that was before Trump's self-styled "Liberation

Day".

Beijing's first response might be to try and negotiate with

Washington to get the tariffs lowered. But if that fails, FX

devaluation becomes a real option to offset the shock.

Analysts at Goldman Sachs are among those who believe China

will continue to resist "significant" FX depreciation, but they

note that the combined impact of all the U.S. tariffs on China

announced since Trump's inauguration in January could take a 1.7

percentage point bite out of China's annual growth rate. That's

huge.

What do the FX markets think? You should never read too much

into one day's moves. But it's worth noting that dollar/yuan on

Thursday clocked its biggest spot market rise in five months,

and the People's Bank of China allowed the yuan to depreciate

the most in four months at the daily fixing.

Moving forward, the big level to watch for spot dollar/yuan

is 7.35, and 7.25 for the central bank's daily fixing. Breaking

through those would leave the yuan at its weakest point against

the U.S. dollar since the depths of the Global Financial Crisis

in late 2008.

The yuan isn't too far away from these levels right now. The

world is watching.

What could move markets tomorrow?

* U.S. non-farm payrolls (March)

* Federal Reserve Chair Jerome Powell speaks on the economic

outlook

* Canada unemployment report (March)

If you have more time to read today, here are a few articles

I recommend to help you make sense of what happened in markets

today.

1. Trump's tariff formula confounds the world,

punishes the

poor

2. The real tariff uncertainty starts now: Mike

Dolan

3. Trump's global trade war may defeat US strategic

goals

on China

4. Trump's tariffs roil company plans, threatening

exports

and investment

5. US investors caught off-guard by depth of tariffs

are

braced for more pain

Opinions expressed are those of the author. They do not

reflect the views of Reuters News, which, under the Trust

Principles, is committed to integrity, independence, and freedom

from bias.

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