Equity, currency, and bond markets have been in turmoil since early April, triggered by Donald Trump\u2019s escalation of tariffs on all US trading partners.
\nThe new tariffs, which average 20-25%, vastly exceeded market expectations, are significantly higher than the 4.6% trade-weighted tariffs on US exports. In 2023, US tariffs on imports were around 2.2%. Negative surprises like this often lead to sharp market reactions.<\/p>\n
After a ‘measured’ decline in US stocks last Thursday, risk markets saw dramatic declines by Friday and Monday. Sub-investment-grade corporate bonds and loans were pressured, even as government bonds rose. Emerging market and commodity-related currencies weakened; the Australian Dollar dropped 4% against the Pound on Monday.<\/p>\n
Last Friday marked a shift from normal buying and selling to a \u2018capitulation\u2019\u2014a liquidity squeeze where forced sellers flood the market. This happens when speculative capital markets, relying on borrowed money, experience margin calls as asset prices fall. These forced sales create extreme market imbalances, driving prices lower and affecting other asset classes, such as gold and government bonds.<\/p>\n
More Drama Is Expected<\/strong><\/p>\n The situation escalated today, when additional tariffs took effect. Many countries, including Vietnam, are attempting to negotiate, but Trump\u2019s economic adviser Peter Navarro suggests these efforts won\u2019t suffice.<\/p>\n Retaliation is already underway. China plans to impose 34% tariffs on all US goods starting on April 10, while also restricting exports of rare earths. Trump has threatened to raise tariffs further to 104%, criticising Beijing\u2019s response. Europe is also preparing a reaction, which may include extending trade barriers to IT services if negotiations fail.<\/p>\n Understandably, investors are growing increasingly nervous about rising uncertainty. Trump\u2019s ongoing negotiation deadlines, with high-stakes \u201chardball\u201d tactics, keep risk levels elevated. Markets briefly rose on rumours of a tariff suspension, only to fall again when the news proved untrue.<\/p>\n Where Might Markets Find Good News?<\/strong><\/p>\n The unexpected tariff increases have led analysts to revise economic growth and corporate profit forecasts. JP Morgan now predicts US growth will contract by -0.3% year-on-year, with Canada hit hardest at -0.8%. Goldman Sachs and Morgan Stanley have similarly adjusted their outlooks.<\/p>\n Despite earlier optimism, investors are now more pessimistic. Fears of a global recession dominate, with global equities down 15% since February. However, Trump\u2019s policies could eventually lead to positive interventions and mitigate some economic challenges.<\/p>\n China and Europe (including the UK) may avoid recessions, though China\u2019s growth will likely fall short of its 5% target. While the US Fed faces a tough decision, it may cut rates if market stress intensifies. Other central banks are also poised to act more quickly than expected.<\/p>\n Domestically, Trump faces growing pressure from supporters who are concerned about inflation, recession, and falling asset values. Republican Senators are considering a bill to declare the tariffs unconstitutional, and even Elon Musk has criticised Trump\u2019s trade policies.<\/p>\n