It pays to watch the headlines closely in a market like this and to catch the sudden moves. But when the dust settles, it also pays to not get swept away by the optics and to focus on the bigger picture. And in the whole saga so far, Trump just managed to hoodwink the world into accepting blanket 10% tariffs as a “good” thing.
We avoided the worst-case scenario of the world economy being left in ruins. However, there’s still a bunch of tariffs that many countries will have to deal with in the meantime. Sure, there will be negotiations and deals to limit that eventually. But in the meantime, there will still be economic pain spread across the globe.
Adding to that fact is the sheer uncertainty of what is going to happen next in this whole tariffs saga.
For markets, Trump relenting might have seen like a good thing. The S&P 500 posted its eighth best day on record with the Nasdaq’s over 12% gains being its second best day ever. Does that mean all is well with the world? Not quite.
Trump lifted China tariffs and now the entire focus of the trade war hinges on US-China relations. And so far, the signs are pointing to the likelihood that we aren’t going to see this all be resolved soon. As such, there is scope for the uncertainty to prolong and for tensions to stay high or even escalate further.
But even just looking from a pure tariffs perspective, there isn’t anything much to cheer about. We’re still going to see the highest set of effective tariffs since the 1930s for the time being.
h/t @ Peter Berezin (BCA Research)
So, we avoided Armageddon but there’s still a meteor coming. There will be a hit to the world economy from the tariffs and if this carries over to a recession eventually, the question is how and what will the recovery be like? Is it going to be similar to that during the post-Covid era? Or one that sees the world stuck in a slow growth environment for many years?
There’s still so much uncertainty up in the air at the moment. And to answer some of those questions, it’s also a case of seeing how the US and China can make nice over the coming weeks/months.
I don’t doubt that markets can be hopefully optimistic that Trump will eventually want to strike a deal with China. His latest retreat in the tariffs position shows that his gameplay when it comes to pushing hard policies is consistent at least. That is to go with something crazy and then water it down to make it look like it is not a big deal.
If you think about it, it is kind of like a kid asking his parents to buy him an iPhone for Christmas before eventually “settling” on a PlayStation 5 instead. And that was what he wanted all along.
But amid all the uncertainty still persisting, we might not get that V-shaped bounce in risk trades or in the economy that we got during the recovery from the Covid pandemic.
