“A Game Changer”, the “worst case scenario” or “the day America reclaimed its destiny”. Those are just some of the headlines from US President Trump’s announcement and escalation of a global trade war after he announced sweeping tariffs on so-called “Liberation Day”. There had been huge speculation coming into this event, and even while DJT was speaking, there were press reports that added to widespread market volatility during his announcement. Ultimately, the swathe of tariffs likely means a painful period of transition for markets, with positives for the US economy seen only much further out.
Donald Trump’s love for tariffs is well known as he sees them having multiple uses – a way of reshoring manufacturing to the US, a diplomatic tool to force change and a source of raising tax revenue to potentially pay for tax cuts. After that initial confusion as to the exact country-specific rates, Trump announced tariff rates ranging from 10-60%, depending on the country, alongside a 10% universal tariff. There was a clear distinction between those countries deemed to have cheated America, with Asia especially getting hit hard. Economists reckon that proxying the top 20 of trade partners (contributing 85% of imports into the US), depending on what happens with Canada and Mexico which is still unknown, the announcements work out as being in an 18.5-26.5% tariff. That’s about $600bn of tariffs.
Broadly, the new levies were generally tougher and more widespread than markets had expected, and have sent shockwaves through multiple asset classes, amid worries that the aggressive duties will raise the risk of a US recession, hit corporate earnings, and increase inflation.
Ultimately, it is hoped these tariffs will generate substantial tax revenue that gives President Trump the fiscal headroom to deliver on his promises for big tax cuts later this year. But in the meantime, squeezed US consumer spending power and corporate profits, and tighter profit margins risk a weak economy. There might also be less confidence in the dollar, if market moves become disorderly, with uncertainty raised and confidence harmed, even with any backtracking and negotiations.
Maret reaction
Risk-off is the name of the game at present, with pressure on stock markets immediate and Wall Street looking at losses of 3%+ due to the implicit tax hike for US consumers. Companies like Nike and Apple will be hit hard on account of their exposure to Asian countries lumbered with high tariffs. The rotation out of tech and growth stocks into value stocks and defensive sectors should continue.
Regarding FX, the market is emphasising the “stag” part of stagflation, so the trade weighted dollar is weaker with lows last seen in October, as it is sold against the big, liquid defensive currencies of the Japanese yen and Swiss franc and, to a lesser degree, the euro and the pound.
Near-term expectations
More short-term volatility is highly likely, with the dust still settling and traders awaiting the reaction function of nations, retaliation and negotiations. In order to restore some market stability, much will probably depend on how “final” current announced tariff rates are. The greenback will likely need some positive news on tax cuts or deregulation to find any semblance of support. Donald Trump’s promise to restructure the global trading system has begun, with trading opportunities aplenty.