Amid the deliberate drama of US president Donald Trump’s brinkmanship on tariffs, the relative calm of the markets stands out by contrast.
Back in April when Trump made his initial Liberation Day pronouncements, the markets wobbled significantly. This time around, while they did come back marginally for record highs, the move has been modest.
So what gives? Is the market betting that this is simply another Taco [Trump Always Chickens Out] trade – tough-talking by the president for the benefit of his Maga [Make America Great Again] constituency?
Both EU and US officials have made it known in recent days that a deal is very close, so much so that the EU, at least, was taken aback by Trump’s weekend bombshell. It would not be alien to the president’s playbook to intervene at such a point and then take credit later when a deal follows as expected.
Or are investors buying into the Maga belief that companies exporting to the United States can and will swallow the tariff impact by cutting their prices so there is no impact on end consumers?
As Davy head of equities Aidan Donnelly puts it: “Either Wall Street doesn’t believe that these measures will actually go through or they just don’t care.”
Trump supporters point to the lack of any inflationary impact over the past three months. But that ignores first that most companies have stockpiled precisely to try to beat tariffs, and second that those months have, for the most part, involved threats rather than concrete action on tariffs.
About 80 per cent of clothing and footwear sold in the US last year was imported, according to Euromonitor. And 61 per cent of all imports came from four markets – the European Union, China, Mexico and Canada.
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The notion that consumers and the US economy can escape any impact from tariffs is fanciful, as is the idea that margins are so fat that companies can simply cut prices to fully offset a 30 per cent tax.
Stock markets, Donnelly argues, may be underpricing the risks.
The sharp rise in bond yields back in April forced a Trump rethink, he says, strengthening confidence in a “Trump Put” – a level for the market at which the president would back down on unpopular policies.
But, Donnelly warns, Trump’s recent policy successes on several fronts mean he may feel able to absorb some unpopularity to push through a tariff policy that appears to be a cornerstone of the administration’s economic plan.
That could yet mean a significant downside for markets and investors.
