Damage Control on Wall Street: Will Trump's U-Turn Arrest the Fall for Long?

Wall Street is finally showing signs of calm, with the S&P 500 index nearing a recovery from bear territory. After dropping more than 10% following US President Donald Trump’s tariff announcement on April 2, the index has now managed to erase nearly all its losses. In just a single week, the index has surged over 5%. Interestingly, what has sparked this wave of optimism is Trump's U-turn—something that would usually be seen as a red flag.

From saying he had "no plans" to fire Federal Reserve Chairman Jerome Powell, whom he also called a "major loser", to suddenly hinting at lowering tariff rates on Chinese imports, Trump’s policy flip-flops are lifting market sentiments this time. "The equity rebound in the past two days is the direct result of Donald Trump’s seeming U-turn on his stance on China tariffs," global brokerage firm Jefferies stated in its recent Greed and Fear report.

However, Wall Street's fear gauge, CBOE Vix, is still looming around 25, indicating that a mood of caution might still be present on the street. While US Treasury Secretary Scott Bessent recently said that the ongoing tariff rate against China is 'unsustainable', the former country has clarified that there is no prospective deal on the table yet. Plus, with the falling US dollar index coupled with bond yields surpassing a record 4.5%, Wall Street might just need a greater dose of optimism.

"We know that the US president puts a lot of significance on the performance of the stock market, to validate his policies and use it as a barometer on how well the economy does under his leadership. For this reason, there might be an element of damage control in his recent climbdowns, as a response to the initial market reaction on tariffs," said Ross Maxwell, global strategy operations lead, VT Markets.

But, with uncertainty still in the mix and conclusive trade negotiations hardly visible at the moment, bears might still dominate Wall Street sentiment.

What is even more concerning is the contrasting performance of market instruments of peer economies, which might act as a further drag on sentiment.

Market Divergence Weighs on Outlook

The US dollar has fallen by 9% against the euro so far this year, despite the European Central Bank’s rate cut of 75 basis points. This might signal that besides interest rate differentials, there are other factors exerting pressure on the dollar.

Meanwhile, in equity markets, there has been a noticeable decoupling between US markets and its Asian counterparts, China and India. The 10-year average correlation between the US's S&P 500 index and India’s stock market has dropped to 0.39 from 0.54. Similar is the case with China, where this correlation has declined from 0.30 to 0.20, as per an analysis by Yes Securities.

Global markets often follow the cues of Wall Street because when the US sneezes the world catches a cold. However, it now seems the US market might be losing some of its influence on global investor sentiment, as rising uncertainty and other macro factors weigh more heavily on peer markets. Even if the Trump administration takes steps to lower tariffs or provide relaxation on certain trade policies, the damage to the overall market mood might already be done. And moving ahead, this shift in market dynamics will eventually keep the overall movement in check, limiting any major uptrend.

"We will need to see if the softer rhetoric is sustained, but the sharp swings are likely to continue and be dictated by Trump's latest comments and outbursts," said Maxwell.