Please see below article received from Brooks Macdonald this morning, which provides a global market update. Please also refer to the additional comments at the end of the article for further context.
What has happened
The past 36 hours has seen a massive recalibration in markets following US President Trump’s ‘Liberation Day’ tariff announcement on Wednesday evening UK time. Coming into this week, there had been debate as to whether Trump would introduce either baseline or targeted tariff rates – in the end, he did both and based on a formula reflecting the size of relative US trade deficits with trading countries rather than trade barriers per se. Markets reacted swiftly with equity prices down sharply and bond prices up yesterday as safe-havens were sought out – US stocks saw the epicentre of the selling pressure yesterday, with the broader S&P500 (-4.84%), the technology-focused NASDAQ (-5.97%) and the small-cap Russell2000 (-6.59%) all suffering their worst days since 2020, all in US dollar price return terms.
A flawed tariff formula?
Trump has been consistently focused on the size of the US trade deficit, seeing it as the principal marker of perceived trade injustice against the US – that appears to have guided the formula unveiled this week that has calculated the tariffs the US administration is now set to roll out. As regards the targeted tariff rates, Trump’s team is not determining these on the actual tariffs that other countries presently levy against the US but instead using a calculation premised on the US trade deficit for a given country relative to what the US imports from that country. However, trade deficits do not always represent deliberate uneven competition, and instead can often reflect a natural imbalance arising from what goods a country makes and has particular expertise or advantage in.
An unwelcome tariff impact
Tariffs add unwelcome friction into global trade – akin to throwing sand into the gears of often complex cross border supply-chains around the world. Higher tariffs can increase the price of goods imported and sold, which can prove a headwind for end-consumers’ real disposable incomes, and in turn curbing economic growth. Complicating efforts to estimate these tariff impacts, it depends in large part on some still-as-yet unknown factors – for example, will those countries on the receiving end of Trump’s tariffs move to negotiate and compromise, in which case we may have already seen ‘peak tariffs’?, or will there follow a series of retaliation and reprisals from both those countries and the US in turn, risking higher-for-longer tariffs still to come?
What does Brooks Macdonald think
In any negotiation it is not unusual for one side to go all-in at the start with the biggest demands and then pull back somewhat in order to seek a common ground for agreement. For markets, that has to be the hope here, for were these tariffs to stick, then there are clearly adverse risks for both higher inflation pressures and lower economic growth. Complicating that, however, is whether those countries on the receiving end of Trump’s tariffs are able to compromise given that deficits are not always born out of deliberate unfair competitive practices – that could make these tariffs much harder to resolve. For all the events this week, the overarching question still remains whether Trump is seeking an ideological trade reset or a quickly-negotiated compromise – on that key question we are unfortunately no clearer as yet.
Comment
Markets have reacted badly to Trump’s tariffs. As ever, in this type of volatility, you need to remain invested, and if appropriate carry on with regular monthly funding too. For some, it also provides an opportunity to invest capital.
Markets don’t like uncertainty; we need a swift solution. Will Trump bring this to a close quickly? Or will we see drawn out negotiations – or a global tariff war?
The good news is that globally, some countries have been doing well. Japan, China were recovering, and Europe was starting to recover too.
If Trump does bring this tariff ‘negotiation’ to a close quickly, we could see a strong bounce back, or it could take a while for assets to recover.
In October 2024, JP Morgan in their annual report ‘Long Term Capital Market Assumptions’ stated that it would be volatile and that with this outlook, we need to be well diversified with active fund management. I agree.
Steve Speed
04/04/2025