Blindsided reminder to expect the unexpected from Trump’s Twitter feed wakes up period of historic calm in volatility

The period of historic calm across global financial markets is staring at the prospect of a rude awakening after US President Donald Trump unexpectedly raised the stakes in trade talks with China by threatening to increase tariffs even further as early as the end of the coming week.

Risk-off sentiment has been the response to this swerve from Trump, with risk-off mood sweeping across Asian and emerging markets in early Monday trading, following the US President's tweets about raising existing US tariffs on $200 billion worth of Chinese imports this Friday, while hinting at new tariffs "shortly" on a separate $325 billion worth of Chinese goods.

At the time of writing, the Chinese Yuan has fallen at a pace not seen in over two years, by nearly one percent against the US Dollar while the Australian Dollar has weakened by some 0.6 percent against the Greenback, falling below the psychologically-important 0.70 level.

Stocks in China have dropped by more than five percent after returning from a holiday, while Dow futures point to a drop exceeding 450 points. Commodities are reacting to the news as well, with Brent futures falling by more than two percent as demand for Oil drops, while safe haven assets such as Gold and the Japanese Yen are edging higher by about 0.3 and 0.4 percent respectively as of writing.

While it remains to be seen whether the Trump administration will press ahead with the added tariffs, it's already evident that markets are taking some risk off the table, undermining the base case that investors had been pricing in: a formalized US-China trade deal in the near future.

With Chinese Vice Premier Liu He scheduled to lead a delegation to Washington this week, the timing of the tweets also suggests that President Trump is attempting to push through an immediate resolution to the drawn-out talks. This latest development once again demonstrates how Trump's tweets can be a wild card for any attempt to formulate a lasting outlook on global growth, as trade tensions remain a key overhang for markets.

What remains to be seen is whether Trump's wielding of the tariff hammer at a stage of negotiations where the majority thought a new trade agreement with China was close, could be a ploy to jawbone an immediate resolution to the drawn-out trade talks that have dictated market sentiment for close to a year. This development has also served as a reminder of the threat investors still carry when it comes to being blindsided from a set of completely unexpected tweets.

Should the White House indeed proceed with the added layer of tariffs, this is something investors cannot afford to underestimate as it carries global ramifications. Optimism had only just been picking up on hopes that China's economy was finding stability and this threat from Trump risks derailing that train in a hurry. Another shot in the arm for global trade tensions also risks crippling global trade even further, which has already encouraged some very strange trade figures from a list of economies in recent months. Ailing demand would prove another thorn in the side for Germany's ailing manufacturing sector, while the addition of further tariffs would also raise the bar of alarm for shipments from trade- dependent economies. Several economies across Southeast Asia have posted declines for exports since Q4.

It remains to be seen whether the Trump administration will press ahead with the added tariffs, or if China will actually walk away from the negotiating table. What is clear is that investors are already taking risk off the table, as the latest trade developments cloud the global growth outlook for the year. as the end of the coming week.