Last week, the USA set its tariffs at a level not seen since the early 1900s, resulting in worldwide market turmoil. If the signs prove correct, the turbulence may also continue in upcoming weeks.
The situation in both the equity and fixed income markets has been interesting, to say the least, since Wednesday, which was “Liberation Day”, an event that US President Donald Trump has been promising for some time.
After last Wednesday, for example the US equity market has dived steeply, and equity markets elsewhere have not been able to avoid a decline either – these movements have been significant across the globe. Credit spreads have also risen in the corporate bond markets in recent days, especially in high yield bonds.
Market movements are usually complex, but this time there is a single denominator behind the turbulence – the United States’ new regime and the politics it practises. Back in November, following the presidential election, the markets mostly priced in the positive aspects of Trump’s expected policy, such as lighter regulation, and any negative changes were barely discussed.
Now it seems, however, that the country’s new administration has mainly introduced reforms with negative impacts on the markets. Currently it seems that the only thing that interests the markets is the tariffs and their impacts and what the next moves will be.
When Trump was elected president, the general consensus in the markets was that the equity markets will again be one of the key indicators followed by the new president. Now, however, it seems that market movements are of no consequence to the new administration. For now, the path taken by the United States’ policy indicates a wish to reform almost all of the political, economic and social structures.
If the tariffs remain in force as they are now depicted by the administration, it will mean a shift in global trade policy the likes of which has not been seen in decades. Although the markets had predicted a change, it still came as a surprise to many.
In the medium term, the new tariffs will have a negative effect on global growth, which will slow as a result. Particularly in the countries with significant exports to the USA, growth will decelerate considerably due to the tariffs.
The set tariffs will also impact the United States, however. When they are implemented, the tariffs will stall growth and raise prices in the short term. Fears also include an increase in unemployment, a further slowing down of growth, and later, a decline in prices as demand slumps. There are strong concerns around stagflation, a combination of a weakening economy and growing inflation, in the markets.
The start of the year was challenging for the global equity market, but the challenges were almost entirely the result of the poor performance of US tech stock. Conversely, European and Chinese stocks yielded strong returns in the first quarter.
Last week’s tariff decision made the crisis a global one and caused it to spread outside the equity market. The mood is currently low in the markets but panic is only just starting to creep in. We may yet see overshooting in the markets. We can assume that a positive change, such as a shift in trade policy, will eventually defuse the situation.
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