Stocks suffer as Trump’s increased tariffs take effect

Volatility skyrockets as reciprocal tariffs commence

Extreme volatility and a unique risk-off reaction are the names of the game since April 2 when US President Trump opened Pandora’s box. Following the universal 10% tariff imposition on April 5, the country-by-country tariffs have already gone into effect today, with more than 100 countries forced to “pay extra” for access to the US consumer.

Expectations and a drizzle of wishful thinking that Trump would, at the nick of time, postpone these reciprocal tariffs just to give enough time for negotiations were not confirmed. Interestingly though, a plethora of countries, including the European Union, are ready to agree on a new, lower-tariff regime, potentially satisfying Trump and allowing him to sound victorious.

Apart from the EU, which is being penalized by Trump for a number of reasons, including not meeting the 2% threshold for defense spending for the NATO alliance, Trump is fully focused on China and the Fed. Most affected countries have two options: retaliate and suffer pain for the foreseeable future or accept Trump’s demands. China has adopted the first option, and the trade war is on, with potentially underestimated consequences.

Imports of Chinese products are now charged a 104% tariff, essentially doubling their prices, with the Chinese authorities most likely following suit with a similarly sized move, as a high-level meeting has already been scheduled. Most likely, the world has just entered a scary tunnel and there is no light, not even a faint one, on the horizon until Trump chooses otherwise. 

Pressure on the Fed mounts 

Meanwhile, the Fed is stuck in the middle. Despite last Friday’s speech by Chair Powell, investors are wondering about the relative absence of Fed speakers. Therefore, the pressure is on the Fed to be more vocal, especially as the situation has changed since Friday due to the increased Chinese tariffs. Maybe we will get more clarity from Fed officials in tonight’s FOMC minutes and, mostly, after tomorrow’s CPI report.

Understandably, Trump would welcome a more dovish Fed stance and rate cuts soon. The RBNZ has shown the way forward overnight, with another 25bps rate cut announced early today. Tariffs, a weaker growth outlook and the on-target CPI have also allowed the RBNZ to keep the door open for further easing during 2025, with the market pricing in another 90bps of rate cuts by December.

Markets remain in disarray

During yesterday's session, stock bulls tried to recover some of their significant losses. However, the relatively improved risk mood in markets did not last, potentially signaling that conditions are not ripe enough for such a reaction. The bulls' efforts will most likely continue but risk-positive headlines are necessary, even in the form of Trump staying quiet for a few hours.

US stocks are feeling the brunt of the drop, with the S&P 500 index already 11% down in April, the first double digit monthly drop since March 2020. Drilling down into the sectors and, apart from the technology sector, energy, materials and financial stocks are recording the steepest losses. The so-called defensive sectors, such as utilities and consumer staples, are posting much smaller losses.

Euro/dollar has restarted its advance, hovering around 1.1050 at the time of writing. The dollar is also losing ground against the traditional safe haven currencies, like the yen and the Swiss franc, but it is recording significant gains versus risk currencies such as the aussie and the kiwi.

Finally, gold has shrugged off the last two days' performance and is edging higher today, most likely also dragging bitcoin higher. But more importantly, oil prices remain pinned to the sub-$58 area as concerns about a US recession are heightened, and the OPEC+ alliance members appear committed to implementing their planned supply increases.