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Much ado about nothing. President Trump's announcement of 50% tariffs on imports from the European Union starting June 1—only to delay them until July 9—barely rattled financial markets. Investors saw it as yet another instance of the White House's trademark "threat-and-retreat" strategy. This formation is not only becoming a familiar pattern on Wall Street, it's also proving profitable for those trading S&P 500 swings and other assets. Wags are already calling it the "Trump pattern."
Massive Independence Day tariffs followed by a 90-day delay. The 145% tariff on Chinese imports that ended in an armistice. Now, a 50% EU tariff reversed after a phone call with Ursula von der Leyen. Investors have eagerly latched onto the template, snapping up S&P 500 dips with increasing confidence. As a result, the broad equity index is now up more than 1% year-to-date, even though few believed in its rebound just weeks ago in early April.
Chart: correlation dynamics between US stocks and bonds
Over the same period, the classic 60/40 portfolio, comprising 60% equities and 40% bonds, rose by 1.6%. It performed reasonably well through mid-May, but the breakdown of inverse correlation between asset classes has tarnished its reputation. US fiscal concerns, including the credit rating downgrade and the Republican tax-cut bill advancing through Congress, have driven Treasury yields sharply higher.
Rising US bond yields are increasing corporate borrowing costs and pressuring earnings. This comes just after an unexpected 13% surge in Q1 profits among S&P 500 constituents helped spark a rebound in the broad equity index from its April lows.
Markets are moving to Donald Trump's tune, and the combination of tariff uncertainty and fiscal instability is now a strong case for selling all American assets—stocks, bonds, and the dollar.
Chart: S&P 500 corporate earnings growth
Shaken confidence in the US dollar is creating an opening for the euro. Since the beginning of the year, EUR/USD has climbed nearly 10%, boosting returns on investments in European equity indices. A 21% rally in Germany's DAX 400, combined with euro strength, delivers an impressive 31% gain. Is it any wonder that capital is flowing from the New World to the Old, especially as the S&P 500 shows almost no year-to-date momentum?
According to ECB President Christine Lagarde, uncertainty surrounding White House policy presents a unique opportunity for the euro. Strengthening trust in the currency will continue to draw capital into Europe.
Technically, on the daily chart, the S&P 500 is showing a high likelihood of opening with a gap up. The broader index's near-term path will hinge on a test of fair value at 5,895. A successful push by bulls could justify building long positions. Conversely, a failure at that level would create an opportunity to expand existing short positions.
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