Trump's 'TACO' Diplomacy Shakes Markets! Wall Street's Biggest Selloff

Donald Trump sparked the biggest sell-off on Wall Street last Friday since April, when he announced the imposition of high tariffs. The market uncertainty was intense, focusing mainly on stock indices and the cryptocurrency market, but it proved short-lived. On Sunday, Trump posted a message on the Truth platform, expressing hope for a quick agreement with China. What has happened in the last few dozen hours and can we expect a lasting return to stabilization?

On Thursday, China tightened export restrictions on rare earth elements, provoking a fierce response from Donald Trump. Beijing not only introduced restrictions on new elements but also announced a mechanism similar to the US Foreign Direct Product Rule. The new Chinese rule would require companies to obtain government approval to export products to third countries if they contain even trace amounts of rare earth elements originating in China. Trump responded forcefully, accusing China of attempting to block the global market. As a result, he announced the imposition of 100% tariffs on Chinese products, restrictions on the export of key software and the probable cancellation of the meeting with Chinese President Xi Jinping at the APEC summit.The market reacted sharply, recording its biggest sell-off since April amid fears of a full-blown trade war. The negative sentiment also spilled over into the cryptocurrency market, where the sell-off was more severe.

Trump Always Chickens Out

In the case of cryptocurrencies, the recovery occurred relatively quickly. The declines were related to strong short positions and excessive optimism, although there is also speculation about the possibility of insider trading, as large short positions were allegedly taken just before Trump's announcement. As a result, some kryptowaluty are currently trading even higher than before Friday's sale. Wall Street's declines were largely reduced at the opening of futures markets on Monday, following Trump's reassuring message on the Truth platform.The former president, true to his tactics, once again escalated, followed by a swift softening of tone. In recent months, Trump has been repeatedly referred to as TACO, or Trump Always Chickens Out. While this renewed softening of tone doesn't mean an immediate trade agreement, negotiations are ongoing and are expected to culminate at the presidents' meeting later this month.

The currency market remained relatively calm, with the US dollar reacting negatively to Trump's moves, but the scale of fluctuations was limited. gold gained on Friday, and this trend is continuing, suggesting that the market is still not fully convinced of a lasting de-escalation of the situation. On Monday, gold reached another absolute high, reaching $4075 per ounce. Meanwhile, the zloty remains slightly oversold recently, with the dollar trading at PLN 3,6733, the euro at PLN 4,2622, the pound at PLN 4,8996, and the franc at PLN 4,5794.

Source: Michał Stajniak, CFA, XTB