Nervous calm ahead of "Liberation Day"

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

The first trading day of the quarter on Tuesday was a nervy affair ahead of U.S. President Donald Trump's "Liberation Day" on Wednesday, with markets struggling for clear direction as Trump's new trade barriers loomed into view.

Stocks mostly rose but U.S. Treasury yields tumbled, while gold and the dollar broadly held steady. Talking of the greenback, I will dig deeper into the IMF's latest FX reserves data below, but first, here are the scores on the doors from Tuesday's trading around the world. 

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The specter of Trump's new tariffs on Wednesday has sucked the oxygen out of world markets in recent weeks, and despite the generally positive performance on Tuesday, anyone hoping life will be injected back into them once the announcement is made is setting themselves up for disappointment.

There's simply too much uncertainty and too little visibility around how the new tariffs will work, how long they will be in place, what exemptions or concessions there may be, how other countries will react, and what the implications will be for specific sectors, markets and asset classes. 

To paraphrase former U.S. Defense Secretary Donald Rumsfeld, that's a lot of known unknowns, and a fair sprinkling of unknown unknowns too. That fog of uncertainty won't lift on Wednesday, and indeed, is more likely to thicken - hardly the conducive environment for investors, consumers and businesses to get spending.

An announcement has been scheduled for 4 p.m. Eastern Time (2000 GMT) on Wednesday, and it wouldn't be surprising if investors try to maintain a holding pattern across markets until then as best they can. 

The longer term dilemma they and policymakers face was encapsulated in a couple of U.S. economic indicators on Tuesday that showed manufacturing slipping back into contraction, and a measure of factory gate inflation jumping to the highest in nearly three years.

Stagflation risks are rising, markets are skittish, and the common denominator is Trump's tariff agenda.

Japanese stock futures point to the benchmark Nikkei 225 index rising around 0.4% at the open on Wednesday, a pretty small bounce considering the index had plunged 4% on Monday.

In January, U.S. President Donald Trump warned the so-called BRICS nations against replacing, or backing any currency to take the place of, the "mighty U.S. dollar."

While the International Monetary Fund's latest foreign exchange reserves data for the fourth quarter of last year suggests central banks around the world continue to pull away from the greenback, there may be a silver lining for the president.

The IMF's Currency Composition of Official Foreign Exchange Reserves (Cofer) data, the gold standard for FX reserves information, show that countries have been gradually chipping away at their dollar holdings and diversifying for years.

Indeed, the greenback's nominal share of official FX reserve holdings in the third quarter of last year fell to a record low 57.3% from over 72.0% in 2001.

That crept up slightly to 57.8% in the fourth quarter, a rare rise, but the dollar surged 7.6% against a basket of major currencies in the period, its biggest quarterly appreciation in nearly a decade. All else equal, this reduces the dollar-value of reserves held in non-dollar currencies such as the euro, sterling, or Japanese yen.

When adjusting for these FX changes, the dollar's share of reserves slid to a record low of 54.1% from 55.3%, according to Goldman Sachs. At the start of the millennium, that share was over 71%.

But there may be a silver lining for the president.

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.

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