Stocks leaps in worldwide rally after US president softens tough talk on trade and Fed

The S&P 500 was 2.6 per cent higher in trading at midday yesterday (2am today AEST), coming off a big gain on Tuesday that more than made up for its steep loss on Monday. 

The Dow Jones Industrial Average was up 848 points, or 2.2 per cent, as of 11.20am and the Nasdaq composite was 3.6 per cent higher.

Wall Street’s gains followed strong moves higher for stocks across much of Europe, Asia and Australia, where the ASX200 jumped 1.3 per cent.

They continue a dizzying, up-and-down run for financial markets as investors struggle with how to react to so much uncertainty about what Trump will do with his economic policies. The S&P 500 remains 11.7 per cent below its record set earlier this year after briefly dropping roughly 20 per cent below the mark.

While cutting rates could give the economy a boost, it could also put upward pressure on inflation. Economists say Trump’s tariffs are likely both to slow the economy and to raise inflation, at least briefly.

Trump’s tough talk had frightened investors because the Fed is supposed to act independently, without pressure from politicians, so that it can make decisions that may be painful in the short term but are best for the long term.

Trump may have recognised the market’s fear about a move against Powell. He may also be looking to keep someone around whom Trump could blame later if the economy does fall into a recession, according to Thierry Wizman, a strategist at Macquarie.

“Indeed, if the Fed cuts its policy interest rates aggressively, Trump would have little excuse for a recession apart from the pugnacity of his tariff policies,” Wizman said.

Markets also rose after Trump said US tariffs on imports coming from China could come down “substantially” from the current 145 per cent. 

“It won’t be that high, not going to be that high,” Trump said.

The hope along Wall Street has been that Trump may lower his tariffs after negotiating trade deals with other countries, and Trump said on Tuesday he would be “very nice” to the world’s second-largest economy and not play hardball with Chinese President Xi Jinping.

“There is an opportunity for a big deal here,” US Treasury Secretary Scott Bessent said in a speech yesterday.

If Trump brings his tariffs down by enough and quickly enough, investors believe a recession could be averted.

US businesses say they’re already feeling the effects of the trade war. A preliminary reading of US business activity fell to a 16-month low, as the threat of tariffs helped push up prices charged for goods and services at the sharpest rate for just over a year, according to S&P Global’s latest survey released Wednesday.

That’s why one of the few predictions many along Wall Street are willing to make is only that sharp swings for financial markets will continue for a while. The market will “more likely than not continue to be dictated by Trump’s latest whims regarding tariffs and trade”, said Tim Waterer, chief market analyst at KCM Trade.

Trump’s comments also had a big effect on the bond market, where Treasury yields eased. It’s a turnaround from earlier this month, when spiking Treasury yields raised fears that Trump’s actions were scaring investors away from US investments and weakening the US bond market’s reputation as one of the safest places to keep cash.’