ORLANDO, Florida, May 6 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

Deep uncertainty, thin patience

Investors dumped U.S. stocks and the dollar on Tuesday as

the optimism of the recent rebound continued to fizzle, and was

replaced by renewed pessimism about the economic and market

damage from the global trade war.

The surge in Asian currencies over the last few days caught

many investors off guard, and highlights the acute challenges

policymakers in the region face. More on that below, but first,

a roundup of the main market moves.

I'd love to hear from you, so please reach out to me with

comments at [email protected]. You can also

follow me at @ReutersJamie and @reutersjamie.bsky.social.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. Trump says will evaluate trade deals in upcoming

weeks

2. 'Asian crisis in reverse' as currencies soar on

the

dollar

3. M&A deal signing hits 20-year low after Trump's

'Liberation Day'

4. Swiss National Bank ready to take rates below

zero to

tackle low inflation

5. Britain and India clinch major trade deal in 'new

era'

of Trump tariffs

Today's Key Market Moves

* Wall Street slides, with the main three indices losing

between

0.8% and 1%.

* Eight out of 10 sectors on the S&P 500 end in the red,

with

healthcare down 2.8% after the FDA names Vinay Prasad, a

previous critic of the FDA leadership and COVID-19 mandates, as

director of its Center for Biologics Evaluation and Research.

* Moderna is the biggest loser on the index, down 12.25%,

while

Vertex Pharmaceuticals, Regeneron Pharmaceuticals and Eli Lilly

shed 10%, 7.5% and 5.6%, respectively.

* Palantir Technologies sinks 12% after quarterly

results

fail to impress.

* Benchmark Asian stock indices rally - China's blue chip

CSI 300

and Japan's Nikkei 225 both rise 1%, the MSCI Asia ex-Japan

index rises 0.3%, and Taiwan stocks rise 0.9%.

* European stocks fall, but end off the day's lows

after

Germany's parliament elects leader Friedrich Merz at the second

attempt.

* U.S. bond yields fall across the curve, most notably at

the

short end. But a strong 10-year Treasury note auction sparks a

rally at the longer end, bull steepening the curve.

* Oil snaps a six-day losing streak, bouncing back

more

than 3% as the previous day's 4-year lows attract buyers. Brent

futures close at $62.15/bbl, U.S. crude at $59.09/bbl.

* Gold rises 2.5% back above $3,400/oz. April's

record

$3,500/oz is within reach.

* Asia's blistering FX rally pauses, for the most part. The

main

exceptions are China's yuan, which gaps to a six-month high as

markets re-open after the long weekend, and the Thai baht, which

powers to a fresh 7-month high.

Absent tariff clarity, nerves fray

After a few weeks smoldering in the background, investors'

worries over trade, tariffs and growth are very much back on the

front burner.

Figures on Tuesday showed the U.S. trade deficit swelled to

a record $140.5 billion in March as businesses increased imports

to beat the tariffs. Imports from 10 countries hit record highs

but purchases from China fell to a five-year low, a result of

Washington's 145% tariffs on its main economic rival.

Carl Weinberg, chief economist at High Frequency Economics,

calculates that the deficit widening at that quarterly rate

drags down GDP by two percentage points on an annualized basis.

"Ouch!"

This set the tone. Although stocks briefly recovered some

losses after U.S. President Donald Trump said he would make a

"very big" announcement before his visit to the Middle East next

week, Wall Street was in the red all day.

Short-dated bond yields and the dollar fell, the yield curve

steepened and gold prices rose more than 2% for a second day to

within sight of last month's record $3,500 an ounce.

This is the backdrop against which the Federal Reserve began

its two-day policy meeting. It will almost certainly hold the

line on Wednesday, with Chair Jerome Powell expected to say more

incoming data is needed before deciding the next move. Traders

are betting the Fed will resume its easing cycle in July, but

some economists reckon high inflation will prevent any rate cuts

at all this year.

On the trade front, U.S. Treasury Secretary Scott Bessent

said agreements with some of the United States' largest trade

partners could be unveiled as early as this week. Markets are

reluctant to get too excited though - the fact remains,

Washington has yet to announce a single trade deal.

One was announced on Tuesday though, between Britain and

India. However, it should be noted that the on-and-off

negotiations had been underway for three years, and the

projected 4.8 billion pound boost to Britain's economy by 2040

is less than 0.2% of last year's GDP of 2.6 trillion pounds.

Trade talks can be tough, and the final agreements not

always particularly earth-shattering.

Asia FX surge raises doubts about region's trade war

arsenal

The Taiwan dollar's record rise in recent days has

brought a regional conundrum into sharp focus: how much

appreciation can Asian currencies countenance in the face of

U.S. President Donald Trump's global trade war?

Currency depreciation would typically be the weapon of

choice for Asian policymakers seeking to mitigate the export and

growth shocks caused by a trade war. But many Asian currencies

are moving in the opposite direction.

The Taiwan dollar's 6% rise against the greenback over

Friday and Monday marked a record two-day spike. It's unclear

what sparked the surge of capital into a market that was 'long'

dollars and unhedged. Many analysts say it was speculation that

Taiwan had agreed to allow its currency to strengthen as part of

an upcoming trade deal with Washington, a claim Taiwan's central

bank and president have strenuously denied.

But regardless, what matters is that the Taiwan dollar's

jump didn't come in isolation, raising doubts over Asia's

willingness or ability to use FX as a trade war shock absorber.

CONTAGION

In parallel with the Taiwan dollar's record move in recent

days, the South Korean won on Monday also clocked its biggest

two-day rally in 15 years, while China's offshore yuan hit a

six-month high. China's markets reopened on Tuesday for the

first time since Thursday, and the onshore renminbi gapped

sharply higher too.

On Saturday, the Hong Kong Monetary Authority sold HK$46.54

billion ($6 billion) of local currency to prevent it from

strengthening beyond its official band between 7.75 and 7.85 per

U.S. dollar. That was the HKMA's first such action in four and a

half years and its largest-ever intervention in the FX market.

And even though the Indian rupee, Indonesian rupiah and

Vietnamese dong were all recently at record lows against the

U.S. dollar, they have begun to ride the continent-wide crest of

rising currencies in recent days, especially the rupee.

'RIPPED OFF'

This is exactly what Trump wants. Some of America's biggest

bilateral trade deficits are with Asian countries who Trump says

have "ripped off" the U.S. for years, in part, because, he

argues, they have kept their exchange rates artificially weak

through central bank intervention and by accumulating huge

foreign currency reserves.

Indeed, six of America's top 10 bilateral trade deficits

last year were with Asian countries, topped of course by China.

America's combined deficit with these six countries last year

was more than $650 billion.

It's also true that many Asian countries closely manage

their currencies to varying degrees or regularly intervene in

the market ostensibly to limit volatility but implicitly to

exert some control over the exchange rate.

How much any of this is 'fair' or 'unfair' trade is highly

debatable. But what is not up for debate is that the region will

face immediate challenges in an environment where the question

is how far Asian countries can let their exchange rates rise.

CROSSROADS

All else being equal, a strengthening currency will make

these countries' exports less competitive on the international

market, but appreciation could be a price worth paying if it

secures less punitive trade deals with Washington. The weighted

average U.S. 'reciprocal' tariff on Asia is over 40%, up from

around 12% before Trump's trade war, MUFG analysts estimate.

On the other hand, intra-Asian trade is more important than

ever, expanding 43% over the past four decades to more than half

of all Asian trade, according to the International Monetary

Fund. Consequently, ceding some competitive advantage to the

U.S. via the dollar exchange rate will be less meaningful than

relative regional competitiveness. This may limit Asian

countries' tolerance for local currency strength.

The other issue Asian policymakers may struggle with is

dollar weakness more broadly. There was a widely held belief in

the months surrounding Trump's election win last November that

his tariff agenda would stoke U.S. inflation, force the Federal

Reserve to raise interest rates, and therefore boost the

dollar.

But while price pressures and inflation expectations have

indeed intensified in recent months, U.S. growth is weakening,

and markets expect the Fed to cut rates this year. On top of

that, a risk premium has been built into the dollar's price as

Trump's erratic and controversial policies have prompted many

investors to reassess their willingness to hold U.S. assets.

Considering all this, Asian policymakers face huge

challenges in determining how best to respond to the U.S. trade

salvos. But one thing is for sure, 'weaponizing' FX may no

longer be the obvious option.

What could move markets tomorrow?

* Taiwan inflation (April)

* Japan PMI (April, final)

* Euro zone retail sales (March)

* U.S. Federal Reserve policy decision

* Brazil central bank policy decision

Opinions expressed are those of the author. They do not

reflect the views of Reuters News, which, under the Trust

Principles, is committed to integrity, independence, and freedom

from bias.

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