Having dropped as much as -600 earlier this morning, the Dow has staged another impressive comeback and is up 400 points off the lows, and alongside the S&P, is just 1% down on the day, under 200 points in the red. While there has been no specific catalyst for the move (Bullard has been dovishly jawboning in the background urging no more rate hikes in 2018 as there is no wage growth), traders are attributing the move higher to comments by Trump's National Economic Council director Larry Kudlow who said that "markets shouldn't overreact to trade tensions."
Specifically, Kudlow said that "stock markets shouldn’t over react to trade tensions between U.S. and China" because "proposals by both countries are a first step and haven’t been implemented" and as he also added, it is possible the tariffs will never come to pass.
.@larry_kudlow on market reaction to China's tariff announcement: "Don't overreact, we'll see how this works out... At the end of this whole process, the end of the rainbow, there's a pot of gold." pic.twitter.com/ZPeYpYq2Kw— FOX Business (@FoxBusiness) April 4, 2018
Kudlow also said that Trump’s proposal to impose tariffs on Chinese goods is the first step in arriving at a fairer trade system, and that China - not Trump - should be blamed for tensions, something the WSJ agrees with.
"This is the business of government and the business of business," Kudlow said channeling his best inner sophist and added that the U.S. has a case against China and he believes that the rest of the world agrees.
Following Kudlow's comments, Citi notes that the bid for safe havens has begun to ease, with gold coming off the day’s highs and JPY pausing.
USDJPY seems to be turning away from the 106 handle as risk improves. The front end of the US yield curve has picked up a little, with the 2y now trading flat on the day although there is some bear flattening bias here. NZD is looking constructive, even if it's puzzling while most G10 currencies are now trading in the green against USD.
Meanwhile, the USDMXN is lower on a new case of Nafta optimism after Kudlow said "don’t hold me to the timing, but we are moving in the direction of a Nafta deal... I think you are going to see some very positive timing on Nafta... the stock market’s going to love it."
Whether that's true or not is unclear, but for now stocks "love" the apparent detente by Kudlow, even though as we noted earlier the White House is now far more concerned with expanding the trade war with Beijing than where the S&P closes; meanwhile there is little to suggest that either Trump or Xi will relent.
And the biggest paradox, of course, is that if the market rallies, Trump will feel emboldened to pursue even more trade sanctions, escalating the trade war with China to unseen levels.