Trump: Risk appetite turns sour on tariffs, but there is hope they could be short lived

The sell off in stocks on Monday has been broad based in Europe. Although the UK’s FTSE 100 is down by less than other European indices, it is still lower by 1.3%. The Eurostoxx 50 index is down by 1.5% and the Dax is lower by 1.66%. 90% of the FTSE 100 is lower on Monday, and 87% of stocks in the Dax are in the red. US markets have also opened lower, as risk appetite has drained out of the market.

Global supply chain complexity could limit impact of tariffs

Some may think that this is a fairly mild response to a major shift in global trade policy. The reason for this is that global supply chains are complex and calculating the exact impact of tariffs, for example on a BMW car sold to a US consumer, is tricky.  A BMW that is sold to a US consumer is usually made in the US in most cases, BMW have one of their largest car plants in South Carolina. It will only be certain parts that are impacted by tariffs, not the car as a whole. This is why BMW is down by 2.68%, which is quite a knock, but not a rout.

The weakest performers in the Dax index tells us something about the market reaction to the US’s trade policy decisions. Siemens, Volkswagen, Adidas, Porche, BMW and SAP are in the top 10 weakest performers in the Dax on Monday, as autos, global apparel makers and tech are all coming under fire at the start of the week.

The sell-off in US stocks explained

There are some steep declines in line for US stocks. Nearly all sectors on the S&P 500 are in the red, except for energy, which has been buoyed by the oil price rise. Chip stocks and autos are the worst effected sectors on the S&P 500 so far, followed by transport and banks. Autos, transport and semiconductors are directly impacted by tariffs, banks less so. The sell off in US banking stocks is reflective of residual concerns about the impact on US and global growth and the rising chance of a recession.

Nvidia, still reeling from the DeepSeek fall out

Nvidia is set to decline more than 3% on Monday. It is expected to be one of the worst performers in the tech space on Monday, which suggests that there could be something else at play. Apple, for example, is down just over 2% in the pre-market, even though its iPhones are directly impacted by tarr9ofs on China. This suggests that DeepSeek remains a weight on Nvidia’s share price, even if the news has moved on to tariffs and not Chinese threats to AI dominance.

Why the Oil price rise might not last

The oil price is boosting the energy sector in the US today, although European energy stocks are also lower, although BP and Shell are holding up better than the rest of the index. The oil price is higher across the board, Brent is up by 1.8% on Monday and is back above $77 per barrel, the WTI price is higher by 2.7%. The reason is that Canada and Mexico are the largest external supplier of oil to the US, the prospect of tariffs could mean that oil prices in the US move higher, which is infiltrating the global oil space. Refined products are sharply higher, gasoline is up by 4%, heating oil is higher by 3% and Nat gas is surging by 8%. Refiners are more likely to pass on the full effect of tariffs to consumers, which is a concern for the Fed since this could be inflationary in the short and medium term.

Oil price rise could be temporary

However, the upside in the oil price could be short lived since we think that oil supply disruption will be limited since tariffs on oil are ‘only’ 10%, and if tariffs last for the long term, then we could see damage to the global economy which could have a long-term negative effect on oil demand.

Stock market reaction mild so far

Although the declines are sharp, there is a sense that they could have been worse. Trump is a negotiator, who is said to measure his own performance by the US stock market. The 500-point drop in the Dow Jones Industrial Average on Monday and the 1.7% slide in the S&P 500, could force Trump into negotiation mode, to try and limit the downside to US stock prices. Price action on Monday suggests that the market expects a magic bullet and temporary tariffs only. But that means that the longer the tariffs last for, the more damaging they will be to the global economy, stock markets and to risk appetite more generally. Thus, if Trump does not reverse course on tariffs, then this could be the calm before the storm for stock markets.

FX market: Will Trump reverse course on his tariffs?

Unsurprisingly, the dollar and the yen are kings of the FX space on Monday, however, the selloff in FX has not been as bad as feared. While EUR/USD parity looks like a given, this pair has climbed off the lows from last night and is back above $1.0250. This is close to the lowest level since 2022, and although it is a sharp decline, it suggests there are few decent supports on the way down to parity. Added to this, the Cad and the MXN are not the weakest performers in the FX space on Monday. MXN is lower by 1.2% vs. the USD, which is another sign that the market thinks Trump could reverse course on his tariffs.

Another surprise on Monday is the gold price, after rallying last week, as traders used gold as a hedge against tariffs, the gold price is only higher by 0.66%. It is still up $18 and has made a fresh record high above $2,800, but there was not the rush to the $3000 level as some had expected when tariffs came into effect. This suggests that it could be grind higher to this key level, if tariffs are in place for the long term.  

Financial markets have reacted to Trump’s tariffs, but the scale of the reaction has been modest compared to what some expected. Is this because 1, some expect the tariffs to be toned down in the coming weeks, and thus temporary in nature, or 2, that a new US trade policy will lead to a slow burn lower in risk assets? Time will tell.