In a dramatic turn, last night President Trump announced he was postponing (reciprocal) tariffs above 10% for most countries by 90-days – except for China, where total tariffs were raised to 125% from 104%! Markets rallied overnight and into this morning on hopes that this delay signals room for negotiation and eventual de-escalation of the situation, which will hopefully limit the global economic fallout.
While there are no guarantees when Trump is involved, it seems unlikely that such extreme tariffs will remain in place, especially given the growing recession risks they pose. Trump’s change of heart is likely in response to the sharp sell-off in equities, the bond market rout and intense pressure from Republicans and resultant pressure from business leaders – a self-inflicted recession isn’t particularly the legacy the 47th President wants.
Equity markets have led the gains, with US equity indices posting double digit gains last night (e.g. Nasdaq up over 12% which is the second largest on record) and Asian/European stocks rallying this morning. Safe havens like the Japanese Yen and Swiss Franc have also fallen. The Chinese yuan, however, remains at 18-year lows and tensions with China appear harder to resolve.
Uncertainty remains very high and the fact that key policy decisions are seemingly being made almost entirely off the cuff (Trump’s top trade official was reportedly unaware of the delay until after announcement) is a bit unnerving. Again, there are no guarantees here (a delay is still just a delay and not a cancellation), but the fact that Trump appears open to negotiation suggests the previous sky-high average US tariffs will likely come back to more realistic/sustainable levels, which is coming as a relief to markets.
As a result, the GBP/USD has recovered over 1.2% from Monday’s low and the GBP/EUR bounced around 1.2% higher from yesterday’s low. The EUR/USD remains very choppy and continuing to see-saw around the 1.10 mark. Today, we see the release of the latest US inflation figures and tomorrow we have UK GDP data. Both are likely to be very overshadowed by the more recent developments and more time will be needed to see the real impact of tariffs on inflation/growth.
