Tariffs hit

I won’t make this long or complicated. Trump’s tariff announcement was worse than expected. The universal tariff was set to 10% - in line with expectations - but the tariffs imposed to main trade partners are much higher than that: 34% for China, 20% for Europe and some 24% on Japanese imports. The UK comes out less harmed with a 10% rate, while Vietnam and Lesotho are the hardest hit with tariff rates of 46% and 50% respectively. Of course, Trump said that partners could negotiate with the US to lower these rates, but the tension building into the announcement and the initial shock will be hard to digest for many trade partners and will more likely than not lead to retaliation. China already announced it would restrict investments to the US, Europe already warned there will be retaliation, and Japan said it will protect domestic industries and jobs.

Understandably, the market reaction to the tariff announcement was strongly negative. Vanguard’s S&P500 ETF fell almost 3% in the afterhours trading, the US yields and the dollar tanked, gold and Swiss franc rallied, the USDJPY fell to the lowest levels since November as a result of a swift shift to safety. Crude oil slipped below the $70pb on expectation that the tariffs would hammer global growth and demand, and copper futures – considered as a barometer of global growth - tanked more than 3% after the announcement.

FX markets price retaliation

The pricing in currency markets suggests rising retaliation bets to the US tariffs. The US dollar eased to the lowest level since Trump entered the White House, the lowest levels this year and the lowest levels since mid-October. Not only will the US companies see their costs jump on tariffs – which will boost inflation in the US – but their revenue will probably be hit by retaliatory tariffs as well. The combination of higher inflation – even if it’s transitory – and lower growth will inevitably shake the US exceptionalism. The Federal Reserve (Fed) will have to choose its battle: it will probably choose to support the economy as it considers that the impact of tariffs on inflation would be one-off and short-lived and hopefully partly countered by a sharp economic slowdown. But the supply-chain disruptions could make inflation stickier than expected. If that’s the case, the US will feel the negative impact of tariffs for quite a longtime before it starts seeing any benefits.

Partners will inevitably see their growth impacted, as well. The US tariffs could shave 1% off Eurozone GDP, for example, but the US policies could encourage the European governments to give support to their economies and further ditch whatever is left from the budget discipline. The appreciation of domestic currencies could also help taming inflationary pressures if the US dollar continues to lose value on plunging economic growth in the US.

Indeed, the expectation that the US economy will falter faster than others has been weighing heavily on the US dollar since January. And the tariff announcement sent Cable directly up above the 1.30 psychological mark. The EURUSD trades above the 1.09 level while the USDJPY tanked to 147.

Inside equities, the afterhours trading looked like a bunch of US companies announced disappointing earnings all at once. Apple – that’s still got great exposure to China – tanked more than 7% in the afterhours, Nike also fell by a similar amount, while Nvidia lost more than 5% and Tesla tanked more than 8%.

The futures are deeply in the red with the S&P500 futures pointing at almost 3% losses at the time of writing, while Nasdaq futures point at losses of more than 3%. The European futures are severely down as well, with DAX futures down by nearly 2%. The European exports to the US are seen falling by 50% on tariffs according to Bloomberg analysis.

Interestingly, the Chinese CSI 300 is down by less than 1% (although the Chinese exports to the US are expected to tank by around 80%!).

In the next hours and day, the world’s reaction, likely retaliation and how much effort and money countries will deploy to fight the US back will matter. For now, everyone’s sinking, but the US is going under first.