Art Of The Deal

By Benjamin Picton, senior macro strategist at Rabobank

Art of the Deal

Stocks had looked poised for a face-tearing rally today as another Trump pivot on China tariffs over the weekend threatened to blast out shorts. Trump announced that tariffs on computers and electronics would be set at 20% – rather than the full-freight-rate of 145% – placating big tech CEO’s and US consumers. However, late on Sunday President Trump walked back the concession by announcing via Truth Social that electronics are “just moving to a different tariff ‘bucket’” and that the whole electronics supply chain will be subject to “national security tariff investigations”. So, it looks like the reprieve is only temporary.

Is this more Art of the Deal? Is it the Madman Theory in action? Or is it just wild caprice? Theories vary widely from “it’s all part of the plan” to “there is no plan, and this guy has no idea what he is doing.” Much of this is in the eye of the beholder, as is the state of the underlying US economy. On Friday the University of Michigan consumer sentiment index fell to 50.8 and the ‘expectations’ sub-index slipped below 50. 1-year ahead inflation expectations rose from 5% to 6.7%, but Democrats and Independents seem to think that inflation will be in the double digits, whereas Republicans are more sanguine.

close: Democrats expect 7.9% inflation in 1Yr… Republicans expect 0.9% https://t.co/UV74fyYhJu pic.twitter.com/aHmtNEMk0A

— zerohedge (@zerohedge) April 11, 2025

As the rest of us try to second-guess what is really going on in the White House, Trump surrogates Scott Bessent and Howard Lutnick are now playing ‘good cop, bad cop’ with world leaders. Lutnick has been going fire and brimstone to accuse others of cheating on trade and assure us that tariffs are coming, and then Bessent presents as the cool voice of reason willing to cut deals with nations that are willing to play ball with US economic and foreign policy goals.

Bessent has previously said that he expected the cost of tariffs to be “eaten” by the exporting countries, partially through lower prices and partially through a stronger Dollar. The stronger Dollar part of that equation appears to have gone out the window for now as the DXY index teeters on the 100 level, but isn’t overvaluation of the Dollar due to its reserve currency status one of the main bugbears of Trump, Lutnick and Navarro? Perhaps they’re trying to have their cake and eat it too by weakening the Dollar enough to improve US trade competitiveness, but not so much as to threaten its status as the reserve currency. Bessent recently told Tucker Carlson that the Trump Administration still has a strong Dollar policy “over the long term.”

Despite the falling Dollar, increasing fears of global recession and oodles of fresh supply from OPEC+ have seen crude oil prices decline materially, but gold and the Euro have been major beneficiaries as mobile international capital looks for a safe place to hide. EURUSD closed at 1.1355 on Friday and Gold made a new high close of $3,238/oz. Both are down a little in early trade this morning as the pivot to risk-on cuts haven demand. 

A rising Euro will add to the woes of European industry as it faces tariff and defence spending pressure from the USA, the loss of Russian energy supplies and China’s switch from customer to competitor. Nevertheless, 10-year Bund yields have fallen almost 17bps over the course of April while the 10-year US Treasury yield has soared by 29bps over the same timeframe.  

Despite Europe’s Byzantine political system and ongoing competitiveness problems, it appears that some traders at least are interpreting sclerosis as stability and marking Europe up for the fiscal headroom enjoyed by the likes of Germany and the Netherlands. Even perennial laggard Italy is suddenly looking better, with S&P last week upgrading its credit rating to BBB+ citing improvement in public finances. 

Meanwhile, as noted in this Daily last week, Europe is exploring the replacement of tariffs on Chinese EVs with minimum prices, and Spanish Prime Minister Sanchez has recently been in Beijing for talks with China to expand economic ties. This seems a curious move given that China has declared a “partnership without limits” with Russia - who are currently waging a war of aggression on the EU’s Eastern flank – and Chinese autos present an existential threat to European industry that is lagging in the innovation race and struggling for cost competitiveness.

US Treasury Secretary Scott Bessent had earlier warned Europe against cozying up to China by saying that it would be “cutting your own throat” to do so, but at least some European officials seem to think they can leverage the Americans by re-risking the China relationship to demonstrate that Europe “has options”. European policy makers have delayed the imposition of retaliatory tariffs on US steel for 90 days to give negotiations with the Trump Administration the best chance of succeeding, but if Europe continues to pursue closer trade integration with China right up to the 90-day deadline it seems likely that the USA will take a hard line. 

To illustrate one risk: After the US Supreme Court last week issued an administrative order allowing the White House to proceed with firing two Democratic appointees to independent labor boards, there has been speculation that the Court could soon make a determination that would allow for President Trump to dismiss Fed Chair Jerome Powell. If those powers were granted, and a Trump-loyalist installed as Fed Chair, European policy makers would have to be concerned about the potential withdrawal of Dollar swaplines being used for negotiating leverage.

While Europe attempts to walk both sides of the street on the US/China conflict, the UK seems to be taking a leaf out of the MAGA playbook with respect to domestic industry. Prime Minister Starmer convened an extraordinary session of parliament over the weekend to pass emergency legislation to prevent the closure of the Scunthorpe steelworks – Britain’s last remaining integrated steel mill. British Steel’s Chinese owners, Jingye, had reportedly refused earlier offers of government support to keep the plant running. Some commentators have insinuated that Jingye might have allowed the plant to fail on purpose, while UK Business Secretary Jonathon Reynolds suggested that “it might not be sabotage, it might be neglect.” A vote on full nationalization of the works is expected within weeks, but for now British Steel is scrambling to secure supplies of the raw materials needed to continue British steelmaking.

While financial markets will undoubtedly remain focused on tariffs and yields this week, developments in the Middle East may have the potential to blow the price action off course. US Middle East envoy Steve Witkoff recently held talks in Oman regarding Iran’s nuclear program with the Iranian Foreign Minister, while US Energy Secretary Chris Wright held talks in Riyadh regarding US cooperation on the development of a civilian nuclear industry in Saudi Arabia. A second round of discussions between the US and Iran has been scheduled for Saturday. 

President Trump has previously said that failure to reach a deal on Iran’s nuclear program could lead to strikes on Iranian nuclear sites in partnership with Israel, so those talks on Saturday will be a big deal. The United States recently moved at least six B-2 stealth bombers (almost 1/3rd of the active fleet) to the Indian Ocean base of Diego Garcia, within striking distance of Iranian nuclear and oil facilities. This could also be interpreted as a message to China, who has just placed export controls on rare earth minerals and who relies on Iranian oil for its energy needs: “If you hit our supply chains we can hit yours too”. 

The situation is precarious, but could a compromise be hammered out that is acceptable to Iran, Israel and Saudi Arabia, while also giving China pause for thought on trade war escalation? That would really be the Art of the Deal.