ORLANDO, Florida (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

Nasdaq slumps 2%, tariff fears intensify

It was really only a matter when, not if, tariff fears cast a pall over Wall Street and global markets again, and so it proved on Thursday as investors braced for U.S. President Donald Trump's latest announcement on auto tariffs.

The Nasdaq fell 2% and the MSCI World index shed 1% for their biggest declines in two weeks. Earlier, British finance minister Rachel Reeves delivered an update on the country's fiscal and economic health, and as I will explore below, it's a challenging outlook for sterling and UK bonds.

I'd love to hear from you, so please reach out to me with comments at . You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

Today's Key Market Moves

* It's a sea of red on Wall Street at the close, led bythe Nasdaq's 2% slide. Tech is the worst-performing sector inthe S&P 500, losing 2.5%, and with tariff and inflation fearsflaring up, consumer cyclicals lose 1.7%. * Major tech firms are among the biggest single stocklosers: Super Micro Computer -9%, Nvidia -5.7% and Tesla -5.6%. * Sterling is the biggest mover in G10 FX, shedding 0.5%against the dollar after UK inflation figures come in weakerthan expected. * Oil hits a three-week high on U.S. inventory data andmounting concern about tighter global supply. Crude futuresclimb around 1%, their fifth rise in six days. * The 'risk off' environment drags emerging market FX loweracross the board. Investors in Brazil also grapple with risingpolitical uncertainty after the Supreme Court says it will putformer President Jair Bolsonaro on trial for an alleged coupattempt."Tariff Man" flexes muscles, markets cower

"We're going to go with the tariffs on cars," Trump said on Wednesday ahead of the formal announcement in the Oval Office later in the day.

It's a reminder that the self-styled "Tariff Man" isn't bluffing, or at least appears not to be. If he presses ahead with these and other tariffs, like the reciprocal ones planned for April 2, investors face the lousy prospect of faster inflation and slower growth.

With that April 2 deadline and the quarter-end looming into view, investors may choose to trim risk exposure and play it safe. It would be an understandable approach, given current levels of economic and policy uncertainty.

After some surprisingly high U.S. consumer inflation expectation surveys recently, it was the turn of UK consumers on Wednesday. A Citi/YouGov survey showed the public's inflation expectations rose to 4.2%, the highest in two and a half years.

Consumer inflation expectations are a notoriously poor barometer for actual inflation outcomes. But policymakers cannot afford to be complacent, and on Wednesday Bank of Japan Governor Kazuo Ueda reiterated that interest rates will go up if needed to prevent rising food prices from fueling broader inflation.

Minneapolis Fed President Neel Kashkari was more measured, noting the counter forces of low growth and high inflation should keep the Fed on hold a while longer.

What's increasingly clear is tariffs and trade wars are bad news for stocks. Early signs from the handful of U.S. companies that have reported first quarter results show earnings per share growth has plunged, and on Wednesday Barclays became the latest brokerage to slash its year-end target for the S&P 500.

Meanwhile, British finance minister Rachel Reeves blamed swirling global uncertainty for the deteriorating growth outlook, as the independent fiscal watchdog halved its 2025 GDP growth forecast to 1%.

It's an increasingly challenging backdrop for holders of UK assets.

Sterling may be vulnerable to foreigners' gilt trip

The overriding message from British finance minister Rachel Reeves on Wednesday was simple: the challenges facing UK policymakers are mushrooming, and their margin for error is rapidly shrinking.

The UK spring fiscal update made it clear that Britain faces dismal growth prospects this year and still needs to boost public borrowing.

This means investors may start demanding higher returns for lending to the government, or the exchange rate may need to weaken to draw them in. This raises the risk that a weaker pound could fuel even greater inflation, creating something of a doom loop.

So Reeves has to navigate a very challenging environment for sterling and the UK bond market, to put it mildly.

SHORT-TERM REPRIEVE

Markets got some short-term relief on Wednesday, as the UK budget update included more spending cuts than had been flagged and slightly lower debt issuance plans than investors had expected. But the reality is that UK public finances will be under heavy strain in the years ahead.

Government borrowing over the next five years is set to be 47.6 billion pounds ($61.4 billion) more than what was expected only five months ago, according to new forecasts from the independent Office for Budget Responsibility.

And it doesn't look like growth is coming to the rescue, at least not any time soon, as the OBR halved its 2025 GDP growth forecast to just 1%.

On top of this are growing concerns that UK inflation will rise toward 4% later this year, further above the Bank of England's 2% target. And then, of course, there is the looming threat of tariffs from Washington and a global trade war.

Put it all together, and risks to growth in the coming years are skewed to the downside with no guarantee that borrowing costs will fall commensurately.

KINDNESS OF STRANGERS

This is hardly the most attractive offering for the overseas investors who play a critical role in funding Britain's twin trade and budget deficits.

Official figures show that foreign investors owned 32% of the British government's 2.08 trillion pound debt pile at the end of the third quarter last year. That's the biggest share since 2009 and, excluding the Global Financial Crisis, the largest percentage on record.

On the one hand, that suggests overseas investors aren't too worried about Britain's fiscal health. But it's also a risk, as foreign investors are likely to be the first to sell in the event of a shock or crisis, and therefore demand an attractive premium to stick around.

As former Bank of England Governor Mark Carney famously said in 2016, Britain relies heavily on "the kindness of strangers" for its funding. And as the gilt selloff in late 2022 showed, that kindness can't be taken for granted.

Right now, owners of gilts are enjoying the highest bond yields in the G7 group of countries, a reflection more of Britain's testing inflation and public debt dynamics than a positive growth outlook.

Vikram Aggarwal, fixed income investment manager at Jupiter Asset Management, says this suggests the gilt market is cheap and represents an attractive buying opportunity. But this "cheapness" has persisted for a long time, and the weight of borrowing requirements on the market is getting heavier.

"The deterioration in UK public finances can't be underestimated," Aggarwal said on Wednesday.

Reeves won't be underestimating it, that's for sure.

What could move markets tomorrow?

* Industrial and Commercial Bank of China results (full year2024) * U.S. GDP (Q4, final estimate) * U.S. 7-year Treasury note auction * U.S. weekly jobless claims * Several U.S. Fed officials speak, including: Vice Chairfor Supervision Michael Barr, Governor Michelle Bowman,Cleveland Fed President Beth Hammack, Philadelphia Fed PresidentPatrick Harker, Richmond Fed President Thomas Barkin, and KansasFed President Jeffrey Schmid * British Prime Minister Keir Starmer meets U.S. PresidentDonald Trump in WashingtonIf 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 tariffs on Venezuela crude buyers are a potent newtool of US pressure 2. Trump tariffs loom over Britain's debt-laden economy 3. FX markets still suspect Trump is bluffing: Mike Dolan 4. 'This is not the time to go it alone,' NATO's Ruttetells U.S. and Europe 5. Brazil Supreme Court to put Bolsonaro on trial foralleged coup attemptOpinions 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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