Key Takeaways
- The focus is on tariffs and their impact on financial markets, including wild swings in equities and a dramatic sell-off in US Treasuries and the US dollar.
- The US announced a 90-day pause for reciprocal tariffs for countries not retaliating. China has retaliated which has led to a de facto blockade on trade between the US and China.
- The US Administration paused the implementation of tariffs after unsettling cracks in the Treasury market and a slump in the US dollar.
- Exemptions have been made for mobile phones, chip-making equipment, and certain computers. These account for about 20% of all US imports from China.
- Uncertainty around tariffs has led to negative consumer sentiment and business confidence. Spending and investment decisions could be put on hold and these factors could weigh on economic growth from here.
Hello and welcome to this week’s market perspectives. Once again, the focus is on Tariffs as we digest a chaotic week in financial markets with wild swings in equities and a dramatic sell off in US Treasuries and the US dollar.
Last week we discussed the reciprocal tariffs proposed by the Trump Administration. But the backdrop has changed once again after the announcement of a 90 day pause for reciprocal tariffs for countries that chose not to retaliate. This meant that the retaliatory tariffs were only in place for 13 hours before being paused. The 10% baseline tariff applied to all countries remains in place. However, one country that did retaliate was China and after various escalations we’re now at the point where there is a de facto blockade on trade between the two biggest trading partners in the world. The US is applying a total tariff of 145% and China applying a tariff of 125%. Combined trade between the two countries was $585 billion last year and China accounted for around 13% of the US’s imports.
So, let’s consider what caused the US to pause the implementation in what appears to be a considerable climbdown. The US Administration appeared comfortable with the pullback in equity markets, but cracks in the Treasury market were more unsettling and combined with a further slump in the US dollar. The issues in Treasury markets appear technical in that hedge funds were rapidly unwinding positions amid higher volatility and indeed as recently as January, US 10-year Treasury yields have been higher, but the speed of the move last week set alarm bells ringing. The loss of confidence in the US was also reflected in a much weaker US dollar and it does seem we are seeing something of a regime change taking place in the sense that traditional safe havens in US assets are no longer seen as such given the unpredictability of current US government policy. Investors have been seeking alternatives and despite prospects for a much a looser fiscal regime, German government bonds have performed particularly well, and the gold price has made new record highs.
There does not appear to be any underlying shift in the protectionist ideology here from the US, but countries can use this 90-day window to negotiate. The most obvious negotiating tool for other countries is to promise to buy more US goods. This tactic worked for China during the previous Trump administration where they managed to seal a trade deal that they never really followed through on in terms of increasing imports from the US. Over the weekend we did learn that exemptions would be made for mobile phones, chip making equipment and certain computers. These account for about 20% of all US imports from China. First off this is good news in the short term for companies such as Apple who make about 80% of iPhones in China but is likely to be only a short-term reprieve because the White House has made clear that these goods will be included in a tariff package on semiconductors to be announced in the coming months.
So, what comes next? Firstly, market volatility is unlikely to be over, with further headline risks likely. Markets will remain unsettled given how quickly we’ve moved between complacency and hysteria in the space of the past 10 days.
The situation we now face is that the world’s two economic superpowers are basically not trading with each other while the rest of the world faces at least 90 days of uncertainty. These factors are negative for consumer sentiment and business confidence and pose the risk that spending and investment decisions could be put on hold. This would weigh on economic growth until such time as there is greater clarity.
The next few days will see the start of quarterly earnings season. This should give greater insight into the fallout as companies assess the impact of tariffs and give forward guidance through the fog of a trade war. The downside risks to economic growth and corporate earnings are clear, but putting figures on forward estimates is incredibly difficult given the lack of policy certainty. Irrespective of the tariff policies the persistent uncertainty itself will detract from economic growth.
A positive take is that we now know the high watermark for tariffs. Also, there is a limit to the pain threshold of this Administration. Too many financial market dislocations – like we saw last week – will pressure the administration to change tack. For the US’s trading partners, the path of least resistance is to clearly negotiate rather than retaliate. The US and Chinese positions are becoming more entrenched but there is an opportunity for other countries to attempt to limit the impact firstly through negotiations with the US and/or by softening the domestic blow through fiscal measures.
Ultimately, we are now in a position that is far worse than most expected in terms of the tariff regime. Even if reciprocal tariffs are negotiated lower, we are likely to face the backdrop of a 10% global tariff plus specific levies on sectors such as autos. Tariffs for pharmaceuticals and semiconductors are yet to be announced.
While the effective US tariff rate is likely to be lower than the 20-25% range we discussed last week, it will still be well over 10%. Given that this was only 2.5% last year we’ve seen a huge move. For context – it has never moved more than 1% in a year during the period between 1970 to 2025. It is a huge disruption for international trade and impediment to global growth.
