Markets are keenly focused on tariffs at the moment. And yet, even after Donald Trump said it’s the start of Liberation Day in America as he announced 25% tariffs on US auto imports, FX and stocks have so far behaved in a relatively orderly fashion. Perhaps there is some tariff fatigue creeping in ahead next week’s big day as reciprocal tariffs could be “quite lenient” according to the US President.
The auto levies will go into effect on April 2, which is Trump’s self-imposed deadline for unveiling numerous reciprocal tariffs against US trade partners. At this point, there are no exemptions on the overnight auto tariffs, and they will apply to car parts too, which has a bigger effect on global supply chains. The reaction in markets has seen the dollar sell off and stocks hold up, aside from an auto sector sell-off, and rotation into more defensive parts of the market. Ultimately, it’s how tariffs impact business and consumer confidence data in the months ahead that will be key and that’s likely a story for the second quarter.
Of course, as traders we always want volatility but if we’re honest, financial markets have recently been all over the place. One day, stocks are buoyant and optimistic. The next, they’re depressed and, in the red. Markets often have to navigate competing themes and narratives, ranging from central bank policy to economic data and geopolitics. But this rollercoaster of volatility and emotion has been particularly bumpy recently with a lot of two-way price action. In fact, it’s been a whirlwind couple of months for markets since US President Trump’s second stint kicked off in the White House in January.
Washington has gone hard in pushing its reset agenda on trade and security. In turn, we’ve gone from globalization to segmentation, MAGA (“Make America Great Again”) to MEGA (“Make Europe Great Again”), tariffs on to tariffs off, exuberance to detox. The key theme around US exceptionalism has been questioned, with US stock markets and the US dollar particularly vulnerable until the recent mild rebound. Comments that various officials in the Trump Administration are prepared to accept a slowdown – or perhaps even a recession – especially hurt riskier assets. Indeed, a recent Bank of America survey showed major investors and fund managers made their biggest-ever cut to their US equity allocations in March.
The “Magnificent Seven” technology companies have taken a hit, with many now questioning their high valuations and spending plans on AI. The standout loser has been Tesla, the EV-maker owned by Elon Musk, a close ally of Donald Trump, which plunged 15% on March 10th, extending a recent decline that has brought it down by half from its December peak. But the broad sell-off has left certain stocks more reasonably priced, while real economy stocks are expected to underperform amid slowing growth and economic uncertainty.
The mighty US dollar, sometimes known as “King Dollar”, has certainly also lost its shine, falling by over 3% in three days at the start of March. The greenback is often considered the ballast for currency allocations and rightfully so. It makes up one side of 90% of all FX transactions and around 60% of global foreign exchange reserves. It is well and truly the global reserve currency, but as we have seen in recent weeks, wobbles are not just confined to the US stock market. That recent rebound in both USD and stocks will no doubt be heavily dependent on the potential trade war, tit for tat developments and how long the levies last.