'Liberation Day' saw the US impose sizeable reciprocal tariffs, at the punchy end of market expectations, sparking a risk-off move as a result. Analysts are still digesting the repercussions for global markets, but it's fair to say that Donald Trump is trying to re-write the rules of the global trading game, potentially beyond recognition.
If you were hoping that ‘Liberation Day’ would bring greater certainty and clarity on the trade front, and prove to be ‘case closed’ on the matter from a market perspective, then you’re likely to have been sorely disappointed.
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Nevertheless, we did indeed get that eagerly-anticipated Rose Garden press conference from President Trump yesterday, whereby reciprocal tariffs that will supposedly ‘make America wealthy again’ were duly announced. Of course, while that might be a catchy political slogan, the upside inflation, and downside growth, risks that said Liberation Day tariffs present make it rather difficult to believe.
How bad is it?
This is well towards, if not beyond, the punchier/most bearish end of expectations, with high levies, and little time to negotiate them away before implementation. The tariff rates appear to have been calculated by taking a nation’s trade deficit with the US, dividing that number by that nation’s goods exports to the US, and then halving it. For the avoidance of doubt, there is no economic grounding or logic to that calculation whatsoever.
In the run-up to the 'Liberation Day' tariff announcement, markets had traded in predictably choppy fashion, with conviction lacking as participants braced for the impending headline storm.
In reaction to Trump’s announcement, all of that reversed and more, with a distinct bout of risk aversion gripping proceedings, as participants simply liquidated positions. As such, equity futures dumped into the close, with S&P 500 futures falling well over 200 points from the intraday high, while Treasuries gained ground across the curve, led by the front-end.
How did markets react to Liberation Day?
The dollar, meanwhile, was choppy, but ultimately softer, with the DXY dipping into the 103s, and cable nudging north of 1.30. Yet again, participants view the dollar not as a haven, but as the asset most exposed to the utter incoherence and nonsense emanating from the White House. Please see our note yesterday on what all this is doing to the dollar's primacy in currency markets.
In Asia, markets reacted swiftly, with USDCNH surging to 7.35 amid rising panic. Meanwhile, Hong Kong stocks, largely driven by foreign capital, saw buyers step in after an initial drop.
What is China's reaction going to be?
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