Trump tariffs officially go into effect

Typically, you’d see China announce countermeasures as well. But amid the sharp escalation, it’ll be interesting to see how they respond in the next few hours. That besides further devaluation in the Chinese yuan of course. Other than that, expect more countries to speak out against the tariffs and what not while looking to negotiate with Trump over the coming days/weeks.

In the meantime, there will be economic pain in the short-term. And the big thing to watch in the coming days is for credit and funding stress in markets. 10-year Treasury yields are already up another 22 bps to 4.48% and that’s a wild jump from the low of 3.88% on Monday.

There’s also a big tightening in the swap spread for Treasuries, amplified by the weak 3-year notes auction yesterday here. That’s another sign of funding distress and may be further evident by the 10-year bond auction later in the day.

The fact that the non-dealer allotment also fell to a more than one-year low indicates that the recent liquidations are arguably VAR-related and that’s a bad sign if all of this continues. It points to some hedge funds potentially in danger, if not already. And the cascading effect of any blow ups is never a good thing.

Going back to tariffs, it shows that Trump is not going to back down for now at least. And markets will have to swallow their pride and take that on the chin for the time being.

This article was written by Justin Low at www.forexlive.com.