Risk appetite takes a hit as Trump’s tariffs return to the spotlight

Dollar suffers as Trump ups the ante on trade talks 

The US dollar started June on the back foot, as trade negotiations are back in the spotlight. After a relatively calm period on the tariffs front, last week’s court decision blocking some US tariffs appears to have angered the US President, leading to an increase in steel and aluminum tariffs and a tougher stance against China. Similarly, despite the May 31 US announcement extending the tariff pause on some Chinese goods through to August 31, it is evident that sentiment around tariff negotiations is gradually deteriorating.

This change in tactics is also reflected in reports that the US administration wants countries like Japan, Vietnam, India and the EU to submit their best trade offers by Wednesday, June 4, revealing a lack of patience from Trump. Notably, this plan is rather risky, as it could go either very well or horribly badly for some countries, thus hitting market sentiment.

For example, should Trump feel that a country is not making the best possible offer, he could quickly reinstate the reciprocal tariffs, which, in the case of the EU could reach 50%. On the flip side, if Trump is satisfied with a country’s trade offer, then that country would continue to benefit from very low tariffs.

Trump’s perceived predictability is what makes him unpredictable

Critics of Trump also point to a possible postponement of the controversial reciprocal tariffs from July 9 to September 1, citing predictability in Trump’s actions. However, such expectations could make Trump even more unpredictable going forward, as he might opt for a different strategy to silence his skeptics and send a powerful message to the other countries that may wish to haggle with the US on tariffs.

Mixed start for equities in June

This fragile environment resulted in a mixed performance in equities on Monday, with European indices recording small losses and their US counterparts managing to close in positive territory. However, the US equities’ move was far from convincing, as investors remain concerned that the newsflow could quickly turn negative again this week, considerably hitting risk appetite.

Focus on data prints and Fedspeak

Economic data releases could turn this fragile sentiment around, although recent prints are not painting a bright picture. The final Manufacturing PMI surveys were mixed, the ISM Manufacturing PMI survey retreated further into sub-50 territory, and the Chinese Caixin manufacturing PMI crashed to 48.3, which is the lowest reading since September 2022.

Although the Atlanta Fed GDPNow growth estimate for Q2 has risen to 4.6% - driven by an anticipated rebound in trade following the imports’ front-loading in the first quarter of 2025 - this figure could materially change following this week’s data prints, particularly Friday’s US labour market report.

With today’s preliminary eurozone CPI print not altering expectations for another ECB rate cut on Thursday, the JOLTS job openings and Fedspeak could attract some attention. Chicago’s Goolsbee and Fed Board member Cook - both doves and voting members this year - are expected to keep the door open to rate cuts when the tariff dust eventually settles, with Dallas President Logan - an uberhawk but a non-voter in 2025 - keeping the Fedspeak balanced.

Gold and oil drop after Monday’s rally

Gold is hovering around $3,360 at the time of writing, after some progress was made in the Ukraine-Russia discussions in Istanbul, Turkey. A potential ceasefire, even for a few days, might push gold lower, with a meaningful drop below $3,200 needed to reinforce the current bearish trend.

Oil is trying to reclaim the $63 level, battling with its 50-day simple moving average. With US President Trump eliminating drilling and mining bans in Alaska and proposing a deal with Iran, which would allow some uranium enrichment and a partial dismantlement of nuclear facilities, OPEC+ alliance’s decision for another production increase could soon backfire. A drop below $60 could open the door to a retest of the recent lows.