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Renewed Trade Tensions: Trump’s Tariff Threats Spark Market Reactions
President Donald Trump has reignited trade tensions with a fresh series of tariff threats aimed at key trading partners, including South Korea, Japan, and Malaysia. This renewed offensive has caused notable declines in equity markets, with the S&P 500 and Nasdaq slipping by 0.79% and 0.92%, respectively. In response, the US 10-year bond yield rose slightly by three basis points to 4.38%, while gold prices climbed 0.4% to US$3,332 an ounce, reflecting a flight to safety amidst market volatility, indicated by a two-week high for the VIX.
Trump’s Trade Moves
Trump’s recent communications involved sending letters to representatives of 14 nations, signalling an escalation in his aggressive trade policy, ahead of a critical August 1st deadline. The first to receive these letters were government leaders in Japan and South Korea, followed by various countries including Malaysia, Kazakhstan, South Africa, Laos, Myanmar, Tunisia, Bosnia and Herzegovina, Indonesia, Bangladesh, Serbia, Cambodia, and Thailand. The proposed tariffs could reach as high as 40%, with Japan and South Korea facing potential 25% tariffs.
The letters emphasise the imposition of more substantial tariffs on transshipped goods, suggesting that any retaliatory measures from the affected countries will be met with equal or greater responses from the US. This ultimatum is part of a strategic effort by Trump to secure favourable trade agreements prior to the impending deadline.
In parallel, the US is finalising negotiations with India, which has apparently submitted its final best offer, and the EU is keen on capping tariff rates no higher than 10%.
Market Resilience Amid Uncertainty
Despite the escalation in trade tensions, financial markets have demonstrated relative stability, with major US indices experiencing declines limited to 1% or less, while the S&P/ASX 200 experienced subdued trading. Analysts attribute this muted market reaction to the "TACO trade"—an acronym for "Trump Always Chickens Out." This theory is rooted in an observed pattern of Trump announcing stringent tariff measures, only to later moderate or delay them. Notable examples include the dramatic reduction of a proposed 145% tariff on Chinese imports to just 30% and the postponement of a 50% tariff on EU goods. These occurrences often result in brief market drops, followed by gains when tariffs are eased or abandoned entirely.
As Brew Markets noted, the implications of Trump’s tariff announcements can create potential buying opportunities.
Interest Rates and Tariff Dynamics
The pattern of rising bond yields is another factor compelling the Trump administration to reconsider aggressive tariff policies. Increased tariffs typically lead to heightened bond yields, which reflect various market concerns, including:
- Inflation Risks: Tariffs can inherently drive prices higher.
- Market Volatility: Fluctuating bond yields can negatively impact equity markets.
- Financial Stability: Rapid increases in yields risk destabilising financial markets, potentially leading to broader economic fallout.
A comprehensive analysis displays the timing of previous tariff rollbacks and pauses, indicating a correlation between tariff threats and shifts in bond yields.
Valuations Under Pressure
The current environment is particularly precarious for markets, as the S&P 500 is experiencing its highest 12-month forward price-to-earnings ratio in two decades. Meanwhile, the S&P/ASX 200 has also approached near-record valuations. While elevated valuations do not inherently portend bearish outcomes, they offer little margin for error. As Trump continues to leverage tariff threats to expedite negotiations, markets must navigate a delicate balance between optimism regarding prospective trade agreements and the inherent risks posed by high valuation levels.
In conclusion, the unfolding story of Trump’s tariff threats showcases an ongoing struggle between trade ambitions and market realities, posing challenges and opportunities for investors navigating this complex landscape.
