ForexLive European FX news wrap: Market mayhem continues as China retaliates on tariffs

Headlines:

• China announces additional tariffs on US goods to 84%
• Trump tariffs officially go into effect
• China can raise their tariffs but so what? - Bessent
• China should not try to devalue their way out of this - Bessent
• PBOC reportedly calls for major state-owned banks to reduce dollar purchases
• China top officials reportedly to hold meeting to discuss measures to boost economy
• 10-year Treasury yields continue to surge higher as the basis trade implodes
• Oil continues to crater in the wake of a US-China trade war
• Gold looks to jump back up after a brief stint under $3,000
• This is what you should focus on right now
• ECB's Knot: Disinflation is well on track
• ECB's Rehn: The case for cutting in April is supported by downside risks materialising
• ECB's Villeroy: The shock from a trade war is not negligible but no recession in sight
• ECB's Escriva: Worst case scenarios are materialising - FT
• BOJ's Ueda: Will continue to raise rates if economy keeps improving in line with outlook
• Germany's Merz agrees coalition deal with centre-left SPD - RTRS

Markets:

• JPY leads, USD lags on the day
• European equities lower; S&P 500 futures down 1.9%
• US 10-year yields up 16 bps to 4.44%
• Gold up 2.9% to $3,070.14
• WTI crude down 7.4% to $55.16
• Bitcoin down 1.1% to $76,153

What another chaotic day it has been already. And we're yet to even get into US trading!

It started off with a focus on the implosion of the basis trade and that saw Treasury yields sky rocket with 30-year yields briefly touching 5% at one point. The selloff in bonds was the main thing as markets sought to try and figure out if there is a bigger issue to watch out for, particularly after the weak 3-year notes auction yesterday here.

The worry is that all of this may point to funding stress in markets and that's never a good thing. But in the basic concept of the basis trade, it tends to do well in low volatility and not so well during high volatility. It could just be as simple as that. The main issue with the basis trade and why it can lead to exacerbated moves is because of how much leverage is involved. So, that's one to figure out in the days ahead.

As we got into European morning trade, China released a white paper on trade with the US that got caught in a mess from the headlines again. The headlines mentioned "China showing willingness to communicate on trade" but that is nothing new though. Yet, risk trades took to that and stocks rallied for a brief moment.

S&P 500 futures were down by as much as 1.5% prior to that, before proceeding to rally by nearly 1%. Trading after was largely volatile before we got closer to US trading and China dropped their bombshell.

Additional tariffs of 50% to bring the total to 84% just as it seemed like they were not going to escalate things further today. Boom. 🧨

And that set us off into another risk-off bout again in broader markets with US futures down by nearly 2% now.

In FX, the dollar is the only one struggling hard across the board amid volatile trading with USD/JPY down over 1% to under 145.00 while USD/CHF is dipping its toes below the 0.8400 mark today. Even EUR/USD and AUD/USD are both rebounding back to above 1.1000 and 0.6000 respectively on the day.

No love for the dollar as Treasuries are also sold off heavily. If anything, it shows the distaste for US assets in markets at the moment.

Among the main beneficiaries of the day was gold as it also jumped higher from near $3,000 to $3,070 currently. What's not to like with the yuan devaluation and a full-blown trade war raging on.

As for the biggest loser, one can arguably argue that it is oil as prices imploded and fell to its lowest since early 2021 in a fall below $56 currently - down over 7% on the day.

Besides more Trump headlines later, keep a close watch on the US 10-year Treasury auction as well amid the focus on the basis trade implosion at the moment.