Trump U-turn to the rescue, as Tesla surges, and the market ignores weak UK borrowing figures

The good news has continued to flow on Wednesday, and this is having a positive impact on risk sentiment. Stock markets across Europe are rallying, the bond markets in the US and the UK are rallying at the middle and longer end of the curve, the dollar is broadly higher and is one of the best performers in the G10 FX space on Wednesday, oil is higher and the gold price is falling sharply, as safe havens lose their luster.

The end is near for US/ China trade war

The positive news flow that is boosting equities in Europe and the US includes comments from President Trump that he is willing to substantially reduce tariffs on China, and that he does not see the need to play hardball with China on tariffs at this stage. Following on from recent comments from the US, a Chinese official said that the door is wide open for trade talks. These comments are creating the right mood for risky assets to recover, and at this stage there is nothing to suggest that the comments from both sides are not genuine. The issue is, there are still massive tariffs on Chinese and US imports, and talks have not yet started. To avoid a dismal outlook for global growth, as the IMF laid out on Tuesday, an agreement needs to be made quickly.

The positive effect of reduced political interference

When politics and financial markets mix, the effects can be tumultuous for stocks, commodities and recently also for bonds. However, now that the political influence is lessening on financial markets, and the US President seems to be scaling back his plans for tariffs, the market is riding a wave of optimism. Will this be enough to spur a sustainable rally for risky assets? Yes, in the short term. US equity futures are surging in the pre-market, with the S&P 500 expected to open higher by more than 2% later today.

Tesla’s future looks brighter with Musk out of the White House

The impact of a reduced political impact is also being felt in Tesla’s share price on Wednesday. The stock is higher by more than 7.5% in the pre-market, even though it reported a dismal set of earnings, which saw a 20% drop in auto revenue, earnings were also sharply lower than forecast. The company also refrained from giving a growth forecast for this year, saying that the impact of US tariffs made the outlook too uncertain. So, why the big rally in the share price? Firstly, a lot of the bad news is already priced in, the share price is down nearly 40% YTD, secondly, the company cut capex spending, which is being cheered by investors who would no doubt prefer to see positive free cash flow during this difficult time for the company, and thirdly, Elon Musk announced that he would be spending less time in DOGE from next month. This suggests that Musk’s time in the White House, as Trump’s go-to person could be coming to an end. The market is cheering this for a few reasons: 1, Musk will now have even more time to dedicate to his flailing EV business, and 2, his political moves were blamed for falling sales, by breaking this link, sales may pick up in the coming months.

Boeing shares fly high after better-than-expected results

Either way, as the political influence on financial markets is reduced, this is good new for risk, and good news for Tesla. The rise in Tesla’s share price is having a positive effect overall on the Magnificent 7. Nvidia’s share price is higher by more than 5% in the pre-market, as it benefits from the potential easing of a trade war between China and the US. Boeing is also higher by 4%, after it beat earnings expectations. It posted a lower loss per share compared to a year ago, it is producing more planes and the rate of cash burn at the company is also slowing, which is all helping to boost the share price. Boeing will also benefit from an easing of trade tensions.

Looking ahead, financials, energy, consumer discretionary and tech were the best performing sectors in the S&P 500 on Tuesday, and we expect this pattern to continue. Although the uplift was broad based, defensive sectors like consumer staples, healthcare and industrials may continue to lag.

Europe’s PMI data fails to dent market rally

The market is mostly ignoring Europe’s dismal PMI data for April. Perhaps because these surveys could already be out of date. If tariffs between the US and China, along with the rest of the world, continue to decline then this could protect economic growth and boost sentiment down the line. However, it may not help the UK’s fiscal position. Although the bond market has not reacted to the higher-than-expected March borrowing figure, the government may well have to cut public spending further, as wage costs and higher benefit costs pushed up the government’s borrowing needs, which is now becoming a habit for the UK’s labour government. This obviously puts pressure on the Chancellor; however, it is also ups the stakes for her to strike a trade deal with the US and boost trading relations with Europe at the same time. For now, the UK’s borrowing bonanza is not attracting the bond vigilantes, and 10-year UK Gilt yields are down  more than 6bps on Wednesday.