Markets Having a Nervous Breakdown
In this column last week, I advised caution ahead of President Trump’s Liberation Day announcement on ‘reciprocal’ trade tariffs. Although bad news was expected, the level and magnitude of the tariffs now due to start today, exceeded the most hawkish of commentators. Neither did anyone think they could be based on such an arbitrary formula.
The ferocity of the three-day trading reaction that followed, resulted in falls of between 10-15% in major markets, tells us how investors feel about the Trump administration. Markets are focusing on how the confidence shock to consumers and businesses will impact inflation and growth in both the USA and the rest of the world. Depending on what retaliatory approaches other governments choose, an American economic recession is now a slight odds-on favourite for this year.
It is early days, but Trump has hinted that fifty countries are ready to sit down at the negotiating table to talk about tariffs. However, the President has also said he is prepared to maintain his hard line over reciprocal tariffs longer suggesting that a hoped-for-pause in their implementation is less likely.
Nonetheless, it is possible that effective tariff rates start moving down in the coming weeks and months as individual country deals are agreed. Even so, this is not going to help several countries confronted with an effective trade embargo, nor will it deal with the lack of international confidence of trade partners.
In the days and weeks ahead, noise from politicians, businesses, high profile individuals and street protests to try and get the administration to change course will intensify. However, the Trump team appears unsympathetic to this at present, but a hallmark of this President is that he remains highly unpredictable.
Turning back to markets, the technology dominated NASDAQ index has fallen over 20% since its high point in February indicating a technical bear market. The broader American S&P500 index is down 15% from its own high and seems to be heading towards similar bear territory.
The largest falls have been in highly valued technology shares but also transport and coordination companies which are highly responsive to world trade dynamics. Outside of that, companies with international supply chains focused on Asia, such as Nike, Adidas and Apple have fallen more sharply.
Because of the expected slowdown in the global economy and the pumping of more oil from petroleum exporting countries, the price of oil has fallen close to $60 – a short while ago it was nearer $80. This should help reduce pump prices and assist family budgets and restrain a little of the inflation to come.
Where have investors avoided much of the damage? In areas known as ‘safe haven’ investments. Prime amongst these has been gold which is trading at close to record highs whilst specific sectors such as Health, Telecoms and Utilities have all demonstrated resilient performance.
Also, government and quality corporate fixed interest investments have seen strong investor demand as a home for the cash raised from equities. Yields have fallen and prices risen because money markets are now expecting five interest rate cuts this year. Investors believe that the Federal Reserve will have to come riding to the rescue of a US economy floundering to recession.
Later this week, the markets will see prints of US March inflation and a Michigan Consumer Confidence survey, but this is likely to be brushed aside in favour of the latest rhetoric from Trump and his tariffs.
(Cover Image Source: Yorgos Ntrahas)