Markets no longer think Donald Trump is full of bluster and are moving quickly to anticipate a slowdown in U.S. and global growth as he raises a wall of tariffs around the world's biggest economy and trading partners start to respond in kind.
Six weeks into his second term, the U.S. president has hit imports from Mexico and Canada with 25% levies, put an additional 20% tariff on goods from China, threatened reciprocal tariffs globally and cut off military aid to Ukraine.
But instead of the rising yields and higher dollar that investors had wagered on in November, the so-called "Trump trade" is in full retreat.
Trade conflict has begun in earnest and the dollar is falling while bond yields dive.
U.S. allies are rattled. As Goldman Sachs analysts note, the average tariff rate on imports from China is now 34% and the increase is already roughly twice as large as that in the first Trump administration. Nobody wants to bet anymore that there will be swift compromises or deals.
"It is difficult for markets to get on with aggressive positioning given the risk of U.S. tariff policies turning on a dime," said Chang Wei Liang, currency and credit strategist at DBS.
"In credit markets, spreads certainly look too low given the change in risk environment and a more adverse and uncertain trade backdrop."
Volatility gauges for Treasuries (.MOVE) and for U.S. (.VIX) and Japanese stocks (.JNIV) hit their highest levels of the year this week and implied volatility in currencies ticked higher.
Stocks and bond yields slid on Tuesday as investors globally ducked for cover.
Defence stocks ran higher, while shares in technology companies slumped. As China announced retaliatory tariffs and Mexico and Canada prepared their responses, investors reckoned on a global growth slowdown and upped expectations for U.S. rate cuts.
Futures pricing still implies about 75 basis points of U.S. cuts this year, up from about 50 bps two weeks ago, while 10-year yields hit a 4-1/2 month low of 4.115%.
Investors see an uncertain outlook where shelter lies in defensive sectors such as real estate or healthcare. And, while protected companies such as U.S. steelmakers may prosper, higher prices will flow along supply chains with unpredictable effect.
"I'm spending a lot of time talking to CEOs who are really trying to understand the consequence of some of this," said Goldman Sachs CEO David Solomon at conference in Australia.
"Until there's more certainty, we have a little bit more runway time. I think we're going to live with a slightly higher level of volatility. But I think he (Trump) has a purposeful direction that he's pursuing, and we should take him at his word that he's going to pursue that direction."
DIFFICULT TO TRADE
The fall in the dollar has been one of the most eye-catching reversals as conviction turns to confusion in currency trade.
What had, in January, been speculators' largest long-dollar bet in nearly a decade has rapidly unwound - so much so that, as of last week, speculators were short dollars against emerging market currencies and held a record long yen position .
Against the euro , the dollar is down nearly 1% in two trading sessions as the fall in U.S. yields has coincided with rises for European yields since the continent prepares to ramp up defence spending while Trump backs away from Ukraine.
At the White House, Trump took aim at China and Japan for holding their currencies too cheap. In fact, the yuan , against a basket of trading partners' currencies, is historically firm and Japan has been intervening in recent years to buy the yen .
But on Tuesday, as the dollar fell, Nomura's global head of foreign exchange flow, Hoe Lon Leng, said it seemed like the "final blow" for those hoping for a higher dollar.
"That argument is waning and we keep seeing the price action move the other way," he said, noting that if both China and the U.S. did not want to see the dollar go higher against the yuan "then it is going to go lower".
To be sure, market gyrations have not been enormous and plenty of analysts do still see room for trade negotiations and an exit ramp from escalation. But the policy whiplash has gnawed away at hopes investors had in a breakthrough deal.
And nobody can say they are sure Trump is bluffing.
"The threat of tariffs has run its course for now, so the next phase is to endure them," said Jamie Cox, managing partner at Harris Financial Group in Richmond, Virigina.
"Markets have to price in that reality, and those numbers are painted red."
