Pre Asia open: Buckle up the tariff roadshow is rolling into a country near you

Markets

After what was primarily perceived as a Goldilocks NFP print, markets were blindsided by yet another tariff bombshell—this time under the guise of "reciprocal" tariffs. But in any form, tariffs are proving to be a significant headwind for consumer confidence. The University of Michigan survey took a hit, but more concerning was the jump in inflation expectations, which sent Treasury yields climbing negative for risk.

The broader issue is that this latest tariff escalation isn’t just another round of trade posturing—it signals a more profound shift. This isn’t "Trump’s Last Tariff Stand"; all these noises suggest tariffs are increasingly being weaponized for purposes beyond trade policy. That raises serious concerns about what to expect in the run-up to April 1st.

By then, three key reports will land on Trump’s desk, each packed with tariff recommendations stemming from formal investigations (or soon-to-be-concluded ones). This sets the stage for a potential wave of new 'Section 232' (national security) and 'Section 301' (unfair trade practices) tariffs. More ominously, it could also pave the way for a broader ‘global supplementary tariff’—an across-the-board levy aimed at countries with persistent trade surpluses.

The elephant in the room? The sheer size of the U.S. trade deficit, which continues to balloon:

• China: $295.4B deficit
• European Union: $235.6B deficit
• Mexico: $171.8B deficit
• Vietnam: $123.5B deficit

While we still believe "The Art of the Deal" is in play, the reality is that the U.S. will be extracting as many concessions as possible from both allies and adversaries between now and April 1st. Buckle up—the tariff roadshow is rolling into a country near you.

Despite the trade war noise, the U.S. economy has entered 2025 in relatively solid shape. January’s payroll growth of 143k slightly missed expectations, but the unemployment rate ticked down to 4.0% while wage growth remained firm—hardly the backdrop for a market panic. On the business side, the manufacturing ISM finally clawed back into expansion territory for the first time in over two years, while the services ISM held steady, reinforcing the resilience of the U.S. economy.

Meanwhile, over in China, the economic picture is far more muddled. Consumer inflation accelerated at its fastest pace in five months, but producer price deflation lingers—a clear sign of mixed consumer spending and sluggish factory activity. Deflationary pressures remain entrenched, and unless Beijing can reignite domestic demand, China's economic engine risks stalling.

And then, of course, there are Trump’s tariff effect. While the latest batch of levies has yet to send shockwaves, the reality is that any further escalation could squeeze China into an even tighter corner, forcing policymakers to step up fiscal and monetary stimulus efforts. Whether that results in real growth or just another artificial pump remains to be seen, but one thing is certain—tariffs will continue to cast a long shadow over global markets.

Global equity markets

Global equity markets are quietly flipping the script on U.S. exceptionalism. Germany, the UK, China, and Canada have all outpaced Wall Street’s S&P 500 in year-to-date returns, with what I’d call the DeepSeek effect looming large. The AI frenzy that once fueled the Magnificent Seven’s relentless rally seems to be losing its grip—at least for now—as investors question whether the U.S. tech trade is as bulletproof as it once seemed.

This is not to suggest that the AI well is drying up, but there's a noticeable shift in investor behaviour. Instead of piling back into the usual suspects, capital is flowing into safer havens. According to EPFR Global data, money market funds absorbed a massive $46.8 billion in the week through February 5, bond funds attracted another $16.6 billion, and equity funds saw a modest $600 million outflow.

The takeaway? Investors are getting cautious. The DeepSeek narrative is shaking up AI dominance, and the looming tariff storm—both domestically and internationally—is adding another layer of uncertainty. If the Magnificent Seven lose their role as the primary driver of U.S. inflows, investors who have been banking on the US exceptional narrative to carry them through 2025 could be in for a nasty reality check.