Tariff Twist Sparks Rally, But Risks Remain

Sreelahari Reddy B

Global capital markets were set ablaze this week as U.S. President Donald Trump made an abrupt policy pivot, suspending a wave of reciprocal tariffs just 24 hours after they came into effect. The reversal triggered one of the most powerful rallies in recent memory, offering a dramatic reprieve to battered equity markets, easing pressure on bonds, and jolting currency markets out of their slumber.

But while the surge provided much-needed relief after weeks of intense selling, capital markets are now contending with a deeper question: Is this a true reversal of protectionist policy or just the eye of the storm?

Equity Markets Rally on Relief, But Foundations Remain Fragile

Across equity markets, a classic “buy-the-dip” response unfolded with force.

• In Europe, the Euro Stoxx 50 leapt 7.5%, Germany’s DAX rose 7.4%, and the UK’s FTSE 100 advanced 5.1%. The STOXX 600 had its best day in over three years, with battered sectors like banking, industrials, and energy roaring back.

• On Wall Street, the Nasdaq soared 12%, the S&P 500 gained 9.5%, and the Dow Jones added nearly 8% posting its third-biggest one-day rally since World War II.

• Asian markets followed suit, with the Nikkei 225 up 9.1% and the Kospi gaining 6.6%.

The catalyst? Trump’s announcement of a 90-day suspension on new reciprocal tariffs for most U.S. trade partners, excluding China. Investors quickly recalibrated risk models, priced in a lower short-term likelihood of a global trade recession, and dove back into risk assets.

Still, institutional managers remain skeptical. “This isn’t a pivot in policy, it’s a pause,” said a senior strategist at BlackRock. “Markets are pricing in optimism, but we’re still operating in a deeply uncertain trade and geopolitical environment.”

Bond Markets Stabilize After Panic Selling

Just days prior to the rally, U.S. and European government bonds had suffered one of their steepest selloffs in years. A surge in yields reflected investor fears that inflation could spike, global growth could slow, and traditional safe havens may no longer offer protection.

• U.S. 30-year Treasury yields spiked 70 basis points over two sessions, a stunning move in such a short time.

• German bunds, typically among the safest of havens, also saw yields rise sharply amid fears of collateral damage from tariffs.

However, following Trump’s tariff retreat, yields moderated slightly, and bond prices stabilized.

President Trump himself referenced the bond market directly in his press conference: “The bond market is tricky, but now it’s beautiful.” Still, seasoned fixed-income traders know better yields at these levels are signaling concern about policy credibility and market liquidity, not economic confidence.

Currency Markets React Swiftly, Dollar Retreats

In the foreign exchange (FX) market, the U.S. dollar weakened sharply, reflecting a shift in sentiment and an unwind of recent safe-haven inflows.

• The euro gained 2.16% against the dollar, hitting $1.119—its highest in seven months.

• The Japanese yen, another traditional refuge in times of uncertainty, gave up some gains as risk appetite returned.

• Emerging market currencies, particularly those from export-driven economies like South Korea and Brazil, bounced back on hopes of reduced trade tension.

Currency strategists are watching for signs that capital will rotate out of the U.S. if protectionist measures are seen as a long-term threat to economic growth. “The dollar has peaked in the short term,” one HSBC analyst wrote, “but unless trade peace is confirmed, volatility in FX markets is far from over.”

Volatility Surges, Then Retreats But It’s Not Gone

A critical measure of capital market health, the VIX volatility index, spiked earlier in the week to near-crisis levels but declined sharply after Trump’s announcement.

• The Eurozone’s VSTOXX remained elevated at around 35 points, underscoring that uncertainty is still priced into European markets.

• Equity options markets remain highly active, with significant hedging still in place among institutional portfolios.

Volatility has become a feature, not a bug, in global capital markets—a symptom of policy unpredictability and geopolitical risk.

India: An Island of Stability in Choppy Waters

Amid the global upheaval, India's capital markets have emerged as a beacon of relative calm and long-term opportunity.

While the broader world reeled from Trump’s tariff shocks, Indian equity indices Sensex and Nifty 50 showed modest but steady gains, supported by resilient domestic consumption, a strong banking sector, and continued foreign institutional investment (FII) inflows.

India’s Ministry of Finance issued a measured response to the global chaos, reaffirming its commitment to economic stability, fiscal prudence, and trade diversification. Meanwhile, the Reserve Bank of India (RBI) kept policy rates unchanged, citing global uncertainty and domestic inflation within manageable limits.

With global supply chains under pressure, India is increasingly being seen as a potential alternative to China for international firms seeking resilience and cost-effective operations. Sectors like IT services, pharmaceuticals, and specialty chemicals have caught the eye of global investors.

Market analysts from Goldman Sachs and Morgan Stanley have recently upgraded their outlook on India, citing strong earnings momentum and robust macro fundamentals.

“India is not immune to global shocks,” said a Mumbai-based portfolio manager, “but it is better insulated than most and that’s attracting patient capital.”

Looking Ahead: Market Resilience or Illusion?

The question facing global capital markets now is simple: Was this a bear market rally or the beginning of a genuine recovery?

The 90-day pause is not a resolution it’s a reprieve. Investors, traders, and policymakers alike know that further tariff escalations, diplomatic missteps, or economic data shocks could swiftly unwind recent gains.

For now, markets have chosen hope over fear. But with U.S. inflation still high, central banks tightening policy, and geopolitics growing more complex, the path ahead for capital markets remains anything but certain.

As one fund manager put it: “We’ve stepped off the cliff and found a ledge. But we’re not out of the woods.”