Equities react negatively to Trump’s new car tariff surprise

Car tariffs in the spotlight 

Despite expectations of April 2 being the main tariff day, US President Trump surprised the markets with yesterday’s announcement about car imports duties. Starting on April 2, a new 25% tariff will be imposed on all cars and light trucks imports that are not manufactured in the US. Auto parts imports will be given a one-month tariff exemption, potentially until May 3. Additionally, Trump is trying to get approval to make interest payments for US-made cars tax-deductible, to further support American car manufacturers.

Car companies based in Mexico, Japan, South Korea, Canada and Germany will be hit the hardest. Interestingly, this is probably the first time that Japan's economic interests are being targeted by President Trump. It is pretty obvious that while Trump continues to talk about April 2 being “Liberation Day”, he has made a significant move, with wider repercussions than the steel/aluminum tariffs.

Having said that, it should be noted that Trump, as evident in his short duration as the 47th President, could quickly change his mind on the tariffs’ starting date and/or approve exemptions. Affected countries have one week until the new car tariffs officially commence to offer ‘gifts’ to Trump, mostly in the form of new investments, and earn the much-longed-for exemption.

Should this bargaining fail, most affected countries would most likely retaliate. European Union officials are expected to up their rhetoric, threaten to impose harsh trade restrictions and seek agreements with other countries such as Canada. Trump has already commented on this likely development, threatening even higher tariffs on countries that will collude against the US.

Risk appetite plummets

Yesterday's announcements pushed equities into the red, with the Nasdaq 100 index leading the selloff and recording its sixth +1.5% daily correction. It is now on course for the worst monthly performance since September 2023, when the market feared a protracted pause from the Fed. Additionally, despite the ongoing recovery, the Nasdaq 100 is still 10% below its mid-February peak.

Similarly, the S&P 500 index was under pressure yesterday, with the Technology and Communication sectors feeling the brunt. European stocks are expected to suffer the most, though, especially as the April 2 announcements will most likely focus on European-based corporates, such as pharmaceuticals.

Likewise, upon the tariff announcements, the US dollar got another boost, dropping to 1.0735 against the euro, and climbing to 150.74 versus the yen. With month-end rebalancing flows likely benefiting the dollar, the door appears to be wide open for dollar bulls to continue recovering some of their sizeable losses against major currencies.

Central banks are in a dilemma

Amidst these developments, central banks are still trying to meet their targets. Most remain torn between the potentially significant impact on growth, which in the case of the eurozone could be quite sizeable, and the increased possibility of another COVID-like acceleration in inflationary pressures.

The market is currently pricing 62bps and 55bps of easing for the Fed and the ECB, respectively. Actually, the chance of an April ECB cut has been bumped up to 80%. However, with Trump’s appetite growing with each bite, there is a steadily growing risk of stagflation. In this case, most central banks will likely be forced to choose price stability over growth; the ECB will probably be in this camp, while the Fed could be under severe pressure from the US President to ignore the inflation threat and soften its interest rate stance.

Gold and oil keep their recent gains

Gold is trading north of $3,035, supported by yesterday’s announcement, but failing to reach its recent all-time high. Similarly, despite the latest news, oil is mostly maintaining its recent gains and hovering above the $69 area. Having said that, even if one accounts for the possibility of a marked deterioration in US-Iran relations, the current upward move remains somewhat of a mystery, especially as there is an increasing chance of a global economic slowdown.