ORLANDO, Florida (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

Trump drives global trade war up a gear

Investors went on the defensive Thursday, reducing exposure to risky assets like stocks after U.S. President Donald Trumpescalated the global trade wars with his plans to slap aggressive tariffs on auto imports from next week.

There was no uniform flight to safety, however, even though gold leaped to a new high, as mounting inflation concerns pushed up Treasury bond yields. My column below shines a light on the rather surprising resilience shown by currencies of the countries that will be hit hardest by Trump's auto tariffs.

I'd love to hear from you, so please reach out to me with comments at . You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

Today's Key Market Moves

* Gold rises more than 1% to a fresh high of $3,059/oz. * A late wave of selling ensures Wall Street's big threeindices end lower. Under the hood there were some bigger movesin automaker shares, with General Motors ( GM ) down 7.7% and Ford down3.9%. * Mexico's peso falls 1% and the Canadian dollar falls 0.3%,sold off on the U.S. auto tariff news. * Longer-dated U.S. Treasury yields rise to the highest inover a month - the 10-year yield touches 4.4%, and the 30-yearyield reaches 4.75%. * 10-year UK gilt yield rises above 4.80% for the first timesince mid-January, as investors cast a more critical eye on theUK fiscal outlook post-fiscal statement. * U.S. copper futures slide 2.2% from the previous day'srecord high of 5.37/lb.

Investors find automotive for caution

Trump's latest tariff salvo drew widespread international criticism and weighed heavily on global markets on Thursday.

It's not just tariffs grabbing U.S. equity traders' attention as the end of the quarter approaches - the S&P 500 is hovering around a key long-term trend line that technical analysts say could help determine the market's fate in the coming weeks and months.

The index is trading just below the 200-day moving average, having traded above for most of the last two years, during which time the market rose more than 50%. Failure to leap back above this technical level will be seen as a bearish sign.

"Nothing good happens below the 200-day moving average," a quote attributed to billionaire veteran hedge fund manager Paul Tudor Jones, is getting a lot of play right now.

If the flip side of that is nothing bad happens above the 200-day moving average, look no further than gold, which rose again to a new high on Thursday. Gold has traded above its 200-day moving average every day since 17 October, 2023, and appears to be accelerating further above it.

Of course, there's more driving gold higher than just technicals. Fundamental factors like concerns around inflation, growth, and geopolitics are fueling demand and driving momentum. Tariffs and global trade tensions are part of that too.

The uncertainty is also beginning to affect the U.S. corporate earnings outlook. While figures on Thursday showed that corporate profits surged to a record high in the fourth quarter, analysts are lowering their forecasts for this year.

Analysts at Citi estimate that a 10% increase in tariffs roughly equates to a 5%-6% decline in U.S. earnings per share, and Barclays analysts this week lowered their S&P 500 base case EPS estimate to $262 this year from $271.

A lot can change between now and April 3, when the auto tariffs are set to kick in. Trump could scrap them entirely just as easily as he could increase them, so the uncertainty and lack of visibility will likely keep investors on the defensive.

Perhaps one surprising element of Trump's auto tariffs is how well the currencies of the key targeted countries have stood up. Can this resilience last?

Auto tariff FX pain is hitting close to home

While auto company shares around the world are wilting following U.S. President Donald Trump's decision to slap aggressive tariffs on imported cars, the currencies of the most-affected countries are holding up surprisingly well.

    Trump said on Wednesday that a 25% tariff on imported vehicles will take effect on April 3. There will be some delays and exemptions, of course, but this could potentially add another $55 billion to the cost of finished vehicles.

    The United States imported $220 billion of finished cars and vehicles last year, of which 22% came from Mexico, 18% from Japan, 17% from Korea, 13% from Canada and 11% from Germany. Imports of all auto products totaled $474 billion.

    Given these figures, the reaction of equity markets on Thursday was unsurprising: shares of South Korea's Hyundai fell 4.3%, roughly three times more than the broader KOSPI's loss, and some $16 billion was wiped off Japan's transport index.

    German auto shares fell too, extending their losses to 10% over the last three weeks, a period in which the broader DAX has flat lined. Analysts at Morgan Stanley expect shares in "all exposed" European auto companies to fall a further 5-7% in the near term.

But the FX market's reaction was mixed. The Mexican peso fell 1%, and both the yen and Canadian dollar slipped around 0.3%. But the euro and South Korean won rose 0.3%.    

    Indeed, the currencies of the four largest auto-exporters to the U.S. - Mexico, Japan, Canada and South Korea - are all stronger against the U.S. dollar so far this year. And with the exception of the Korean won, they are also all up since Trump's inauguration on January 20.

    The euro is obviously a special case because it is shared by 20 countries and has been propelled higher in recent weeks by Germany's fiscal pivot. Regardless, the euro is also firmer against the greenback this year.

    On the face of it, this is a head-scratcher. The hit to these economies will be significant if the proposed tariffs are fully implemented and kept in place for some time.

    But zoom out a little further, and a clearer picture emerges: one of U.S. dollar weakness.

A DOLLAR STORY

While the 'Tariff Man's' protectionist trade agenda could have positive benefits for the U.S. economy over the long term, the short-term impact is clearly negative. The tariff talk is damaging U.S. consumer and business confidence, and market sentiment, much more than these threats are hurting other economies.

    And U.S. consumers have reason to be skittish.

    Morgan Stanley estimates that, all else being equal, the 25% tariff on auto imports equates to a price increase of more than $90 billion across the industry, or nearly $6,000 per unit on average. Arthur Wheaton, director at Cornell's School of Industrial and Labor Relations, reckons vehicle prices could shoot up by as much as $20,000.

    For a country that uses and loves cars as much as America, that would be extremely painful.

    Trump's tariffs also appear to be one reason overseas investors are reassessing their U.S. assets. Foreign investors are reducing exposure to Uncle Sam for economic, political and valuation reasons. And non-dollar currencies are benefiting in turn.

    "It's mostly a capital flight story. The tariffs are bad for Canada, Mexico and other countries, but investors are also fleeing U.S. assets," says Brent Donnelly, president of trading and analytics firm Spectra Markets.

    The auto exporters' currencies aren't immune to the escalating trade war. The Canadian dollar slumped to a four-and-a-half-year low last month, and the peso could well come under more pressure due to the auto sector's relatively large footprint in Mexico's economy.

But right now, the currency feeling the whiplash most from Trump's tariffs may be the U.S. dollar.

What could move markets tomorrow?

* Japan Tokyo inflation (March) * U.S. PCE inflation (February) * UK retail sales (February)

If you have more time to read today, here are a few articles I recommend to help you make sense of what happened in markets today.

1. US auto tariffs shake global industry as price hikes,job losses loom 2. High-water mark for scary US investment deficit?: MikeDolan 3. UK bond chief hails 'important shift' away fromlong-dated issuance 4. Canadian crude exporters are unintended recipients ofTrump bump: Bousso 5. Economic turbulence shakes US airlines as travel demandfalters

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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(By Jamie McGeever, editing by Diane Craft)