Tariff Latest
Nearly a fortnight has now passed since Donald Trump unleashed his extraordinary tariff plan, and it has since been a tumultuous time for governments, companies and investors. We have seen heavy falls across most investment markets as the realities of an upturned global order set in, but then partial recoveries emerged as the US president went through two stages of backtracking.
China remains in Trump’s crosshairs after Beijing retaliated, triggering several rounds of tit-for-tat escalation, leaving the tariff rate at a staggering 145% on Chinese imports, at the time of writing. Beyond this, the 10% universal tariff remains in place, as does the 25% rate for steel and cars. However, with the exception of China, the country-specific tariffs beyond 10% have been dropped, and over the weekend, tariff exemptions were announced for phones, chip-making equipment and certain computers.
Trump’s Breaking Point
While Trump and his team have attempted to portray these policy changes as part of his grand strategy, scaring trade partners into negotiation, a less flattering explanation is that the markets tested Trump’s resolve and found his breaking point.
In the first days of market turbulence, equity markets fell, but government bonds rallied as investors flocked to ‘safe-haven’ assets, providing the traditional diversification away from equities hoped for at times of stress. At this stage, Trump was at his most bullish, dismissing investors’ worries as normal volatility, suggesting that a little pain now was justified in order to satisfy the longer-term gains that will come from reviving American manufacturing. Whether this was mere bluster or his sincerely held views at this time, investors believed it, abandoning the comfort they had built from his first term in office, where negative market reactions had steered Trump away from damaging policies. The narrative therefore changed, with the worst-case scenario more likely, and bonds started to fall in value, along with equities.
This appears to be the factor that changed Trump’s mind. Faced with rising treasury yields (and so falling prices on US government bonds), we were beginning to see not just losses for investors, but also a worsening of the US government’s fiscal plans. With bond yields rising, the cost of servicing public debt was increasing. Given the level yields had risen to, Trump’s plans of tax cuts and a booming economy would already be more challenging, yet it seemed increasingly likely that a self-reinforcing crisis of confidence was setting in, which would have led to further losses for bonds, throwing Trump’s economic plans completely off course and sending the US hurtling towards a recession.
Economic Impact
Thankfully, Trump u-turned. This reduced the economic risks of his actions, however it has not removed them overall. While his partial reversals mean a total breakdown of trade will be averted, huge disruption will still occur. Tariffs will mean higher prices and less choice for US consumers, leading to both higher inflation and lower growth. Internationally, exporters’ profits will be hit, and political concerns will emerge. While Europe and China are equally scratching their heads wondering how to respond to an unpredictable US, the potential for tensions will increase as China seeks buyers for its exporting stock that would otherwise have been taken by the US, and Europe fears this will lead to ‘dumping’ with potentially disastrous consequences for local producers.
This puts global policymakers in a difficult position, particularly the US central bank, the Federal Reserve. The Fed has a dual mandate of supporting employment, while also controlling inflation. In a stagflationary environment, as the US is now closer to, these goals can be conflicting. The former needs lower interest rates as the US economy moves closer to recession, while the latter needs higher borrowing costs as Trump’s tariffs will have an inflationary impact. Investors currently expect three or four interest rate cuts to be announced by the end of this year, which is one more than was expected prior to April 2, but had inflation not been a likely consequence of Trump’s policies, more rate cuts would have been expected.
Market Movements
Investment markets have been extremely volatile at a time when economic policy has also been extremely volatile. With Trump’s position changing on a daily basis, there have been whipsaw swings in valuations. The losses and subsequent partial recoveries have been very large for just a few days’ movements, but zooming out a little, the total movements have not been huge. At the worst points, the UK’s FTSE 100 and the US’s S&P 500 fell to levels at which they were last at in just March 2024, and so losses of just over a year’s gains were experienced. While over a condensed period this is alarming, compared to falling markets of previous crises, this has not been out of the ordinary.
The caveat here, of course, is that we are not yet out of this crisis. Trump’s stance is almost certain to change multiple times, especially when you consider his stated reprieves are for 90 days only, and therefore further volatility should be expected over the coming weeks and months. Uncertainty is rife in this environment, with little confidence in the shape of trading conditions between the world’s largest economy and its partners.
Calling the direction of trends is therefore difficult in this environment. The process favoured in the investment portfolios managed by Future Money is to maintain diversification while having a bias towards those areas trading on the most reasonable valuation levels. The US equity market has traded on the highest valuations over recent years, and with faith in the US president, economy and currency now wavering, the old assumptions of US exceptionalism appear fragile. As such, it is Future Money’s opinion that other areas of global markets are better positioned to weather the storm that Mr Trump has created.