Wall Street returns from day off to Smoot-Hawley tariff chatter, sterling hammered as gilt yields hit 27yr high

The US is back from its Day Off. Treasury Secretary Scott Bessent reckons the Supreme Court would side with the administration over the legality of tariffs.

He also said there were other means to get tariffs to stick, citing the 1930 Smoot-Hawley Tariff Act…did it work? Anyone?

Anyone know the effects? It did not work and the US sank deeper into recession…

For those in the back, this refers to the famous scene in Ferris Bueller’s Day Off when the teacher is trying to instil some knowledge into his pupils.

The full quote is: “In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the… Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act. Which, anyone? Raised or lowered?… raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone?… Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression.”

Markets don’t like talk of this sort – Smoot-Hawley is widely regarded as a stunning example of economic self-harm. The US stock markets were closed yesterday for Labor Day , so I guess we’ll find out the reaction to the court ruling that said most of Trump tariffs are illegal, and the response from the White House via Bessent, today. So far, US futures are pushing lower following Friday’s decline, with S&P 500 futs testing the key near-term support of the 20-day line. European stock markets are tripping up this morning, with the DAX down 1% and FTSE 100 lower by 0.6%.

Markets should be used to the volatile and erratic application of Trump’s economic policies, particularly with regard to tariffs. They are not just a simple case of looking at the accounting and moving some figures around. They are global power politics and a reshaping of the world order. And it’s happening at the same time as the administration continues to assail the Federal Reserve. (Although Bessent did also say the Fed should stay independent, but it has made mistakes).

Gilt yields in the UK rose after the prime minister reshuffled the deck, seemingly sidelining his iron chancellor Reeves by poaching her deputy. If the Treasury won’t break the rules, then perhaps Number 10 can? The market move was a sign that investors do not have confidence the Treasury will stick to its strict borrowing rules. Long-dated gilt yields are now trading close to 27-year highs again with the 30yr above 5.7%. 30yr yields at their highest in almost three decades is not a good look for the Labour government, and underscores that there is little fiscal or economic credibility left. Sterling has shipped a mighty 1% or more this morning as a result.

But it wasn’t just the UK in isolation here – Eurozone bond yields also rose as traders looked at a €2tn Dutch pension problem and the looming collapse of the French government as headwinds to buying long-dated debt in particular. Germany’s 30yr yield hit its highest since 2011. French paper is about to be worth less than Italian (ie yields on the 10yr higher). But…the moron premium is definitely evident as the spread between 30yr gilt yields and bond yields of peers widened to a record.

The thing to consider here is that global long-end bonds are in trouble as no one wants to wear duration – this is seeing gold breach a fresh record above $3,500 and silver closed well ahead of the $40/oz level, at a 14-year high. We’ve seen gold trade sideways for months so the breakout to fresh highs suggests strong underlying buying pressures and supportive fundamentals, albeit both metals have averaged modest declines in September over the last ten years. Precious metals are clearly in a sweet spot with cyclical factors like expectations for rate cuts + inflation; structural factors like central bank buying and attacks on Fed independence; and ongoing geopolitical and economic uncertainty re tariffs, wars and so on. We remain in the Great Monetary Inflation, as per the Paul Tudor Jones investor letter of May 2020 that I have cited multiple times in these columns.

Light volume from the US holiday helped sterling rally against the weak dollar – a breach above the 22 August high and 61.8% retracement of the July top-to-bottom move at 1.3540 was rejected and sterling is being heavily offered this morning, trading back below 1.340 as the dollar has also bounced. USDJPY tested and bounced hard off its 50-day moving average and EURUSD was back below 1.17.