Trump’s tariff flip-flops bring mayhem to US markets

Uncertainty over President’s policies is starting to flow into the market

Wall Street indices are tumbling amid Donald Trump's trade uncertainty. AP

US President Donald Trump's tariff approach is unnerving investors and economists, with confusion over the White House's trade policy sagging market sentiment and heightening fears of an economic slowdown.

The US leader on Thursday provided the latest twist in his on-again, off-again approach towards tariffs: excluding most of the goods from Mexico and Canada from 25 per cent tariffs two days after implementing them. That followed a previous reversal on car tariffs on the two countries.

This approach has sent US markets into a nosedive. The Dow Jones fell another 400 points during Thursday's trading session while the Nasdaq officially entered correction territory after tumbling more than 10 per cent from its December high.

“The tariff situation has eclipsed any kind of risk that we have with markets,” said Peter Andersen, founder of Andersen Capital Management. “It is almost unanalysable. Do I just stay on the sideline until this resolves … or try to look through this noise?”

Traders are now tearing up the blueprint from Mr Trump's first term, in which his tariff threats were not met with the same kind of action, nor were they aimed at the kinds of goods that could cause a drop in consumer spending.

It is almost unanalysable. Do I just stay on the sideline until this resolves … or try to look through this noise?

Peter Andersen,
founder of Andersen Capital Management

Nearly two months into office, Mr Trump is upending global trade through his tariff measures, which are changing daily.

“We had a little bit of a dress rehearsal for this in his first term, but nothing to this degree. This is unprecedented, even for him,” said Mr Andersen.

Mr Trump this week also raised tariffs on Chinese imports from 10 per cent to 20 per cent. That followed previous levies on steel and aluminium, and directives to investigate concerns over lumber and copper as well as European trading partners.

“This is the first 100 days of a new administration that's flexing its muscles but having a major negative affect on investor sentiment,” said Art Hogan, chief market strategist at B Riley Wealth.

Uncertainty has crept its way into the CBOE volatility index, which climbed to its highest in almost three months at 24.87.

Donald Trump signed executive orders to pause some tariffs on Canada and Mexico until April. EPA

“I think investors are at the point saying, 'Just tell us where the goalposts are',” Mr Hogan said.

Warning signs are also beginning to flash in the economy. Consumer spending unexpectedly pulled back in January. Reports from the University of Michigan and The Conference Board showed sentiment is tumbling while inflation fears are picking up, largely because of tariffs.

“Sustained periods of elevated uncertainty can be associated with both households and firms holding back on consumption and investment decisions,” International Monetary Fund spokeswoman Julie Kozack told reporters in Washington.

And the Federal Reserve's beige book of economic conditions showed businesses across most of the Fed's 12 districts were concerned over the effects of any tariffs on timber and other materials.

The Atlanta Fed's GDPNow tool anticipates the economy will contract by 2.8 per cent in the first quarter this year.

Fed Governor Christopher Waller has maintained the impact of tariffs on the economy will not be that significant. New York Fed President John Williams said he anticipates it would lead to higher inflation but suggested the Fed needs more data to measure the impact.

Another factor worrying investors about Mr Trump's tariffs this time is inflation. Unlike in 2018, inflation still remains well above the Fed's 2 per cent target.

Meanwhile, concerns of low growth and high inflation – stagflation – are also beginning to emerge.

“We ultimately expect tariffs to impart a modest stagflationary impulse of slower growth and higher inflation on the US economy. The degree of the shock depends on many factors, such as exclusions and how long tariffs are in place,” Wells Fargo economists wrote to clients on Thursday.

Some investors are hoping for a “Trump put”, a term used to suggest the President would not allow the market to tumble too low. But he splashed some cold water on that Thursday, saying his most recent reversal had “nothing to do with the market”.

“I’m not even looking at the market, because long term, the United States will be very strong with what is happening here,” he said.