The so-far benign market reaction to Donald Trump’s latest tariff announcements – which applied massive import levies to dozens of countries including up to 50 per cent on India and Brazil – is hard to comprehend.
Despite the assault on global trade and the ongoing uncertainty around US policy, most major indices traded near record highs last week.
Trump claimed his tariffs were having a “huge positive impact on the stock market” while boasting about how much revenue the US would generate from them when, in fact, the levies represent a stealth tax on US consumers.
On the back of a relatively positive results season in the US, when more companies reported figures that beat market expectations, the markets – at least in the US – seem to be suggesting that the tailwinds from Trump’s tax cuts and deregulation are outweighing the potential headwinds from tariffs.
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Or is it that markets have their collective head in the sand on tariffs and the reversing job numbers in the US?
Back in April when Trump unveiled his so-called “Liberation Day” tariffs and the weird economic calculations that underpinned them, a black hole opened up in front of White House.
As stocks plummeted, investors sold US bonds when, historically, they should have been buying them. Investors typically flee to safe-haven US bonds when stocks weaken but this time it was different, the US was on a reckless path, a trade-wrecking, fiscally-irresponsible path, or so the markets told us.
In what was dubbed “America’s Liz Truss moment”, Trump blinked, putting a stay on his tariff plan.
Now, Trump is back with the same plan and bigger-than-expected tariff rates on dozens of countries, including 15 per cent on EU imports, but the market reaction is benign.
What has changed?
Markets are all about future expectations. Do they now believe the US economy and the global economy can handle higher costs and Trump’s uncertain economic narrative?
Or are they frothy because they believe the Fed Funds will soon be cutting rates?
Or is it, as many contend, that they believe Trump will back away from the worst of his agenda when the US economy starts to sour, the so-called Taco (Trump also chickens out) dynamic?
No one knows and that makes it very hard to pin down the current market dynamic.
