Six factors that could cause markets to rebound or fall further

Markets are acting like a yo-yo, slumping on the Liberation Day announcement for three trading days in a row, then jumping back and forth.

Given Trump’s unpredictability, it’s impossible to know where markets will go next. However, there are three potential factors that could trigger a rebound, and three more that could take markets even lower.

If we do see a further decline in markets, it’s important not to panic. It’s perfectly normal for markets to go through difficult periods and investing is about taking a long-term view. Riding out any market downturns is often the best strategy rather than trying to time when to get out and back in.

What could cause markets to bounce back?

Scenario 1: A longer pause on the latest round of tariffs

Governments and businesses have had little time to plan for the new administration, or even talk to Trump about striking a deal. The 90-day pause on non-retaliating countries announced on 9 April provides some breathing space for them to conduct negotiations and plan accordingly.

A pause on tariffs initially brought relief to investors that governments have a better chance of convincing Trump to lower the rates as they would have more time to negotiate. However, the clock is ticking and 90 days might not be enough to sort everyone out. The queue for the White House could soon be all the way down the road and Donald Trump himself admits that he ‘can’t see that many that fast’.

An extension to the 90-day timeframe could be well-received by the markets.

Scenario 2: Countries begin to announce deals that lower tariffs

A foreign government reaching an agreement with Trump so the US gets something it wants, and the recipient has a lower tariff, could send a positive signal to markets. Investors might think this sets a precedent and other countries will follow suit.

Scenario 3: The Federal Reserve steps in

The Fed might come across as a sloth, patiently waiting for data before it makes any decision, and even then, it only acts slowly. However, the central bank has form in acting fast when there is a crisis. For example, its decision to step in during the Covid crisis and essentially say it would do whatever it took to revive the US economy and support markets shows that the Fed is not asleep at the wheel.

Wall Street calls this invention a ‘Fed put’, an act of support when markets fall sharply and need a lifebuoy. At the moment, it doesn’t feel as if there is enough to make the Fed put on its lifeguard uniform. The 10% to 12% pullback in markets over three trading days following Liberation Day might have felt alarming yet shares have seen several positive days since then.

Markets move up and down all the time and the sell-off doesn’t feel dramatic enough for the Fed to step in. However, a lot can change in a day, so investors won’t be sitting comfortably.

There are some strange movements on the bond market which means now is not a time to be complacent. US Treasuries have a reputation for being a safe-haven asset, yet prices on the 30-year bond slumped during early trading on 9 April. Heavy selling is a red flag, meaning someone is either deeply worried about a US recession or foreign investors are staging a buyers’ strike on US assets and/or dumping them. Investors and the Fed will be on high alert as this is a fluid situation.

What could upset markets and cause further share price declines?

Scenario 1: More countries retaliate and are hit with an escalation of US tariffs

The US raising tariffs on China to 104% has put markets into reverse, with investors shocked that a) Trump actually went ahead with this threat and b) it potentially renders countless Chinese exports as uneconomical for the supplier.

This puts the pressure on other countries to ensure their tariff negotiations go well. The last thing foreign governments want is for their meeting to be a repeat of Trump and JD Vance’s recent White House conference with Ukraine’s Volodymyr Zelenskyy which descended into chaos.

Scenario 2: Weak data points show Liberation Day is starting to cause damage beyond the value of assets like shares and bonds

Markets will not be happy if we get a plethora of data that shows Liberation Day is hurting businesses and consumers beyond the value of their savings and investments.

Investors will be watching for data points on business and consumer confidence, the jobs market, purchasing manager intentions, economic growth and more. Hard facts are impossible to ignore and proof that Trump’s tariff war is backfiring could cause blood pressures to go higher.

Scenario 3: Bond yields remain elevated

Government bond yields ticked up on 9 April, including US Treasuries whose 30-year bond briefly hit 4.516%, worrying because they were only around 4% last week. That’s a massive jump. Bond prices move in the opposite direction to yields — so rising yields mean bond prices have fallen.

If benchmark borrowing costs are elevated and inflation shoots up because of tariffs, it poses major challenges for the economy. Central banks would normally fight higher inflation with higher interest rates — but a weak economy would need lower rates to stimulate spending. That creates lots of uncertainty, which is the last thing markets want.