US President Donald Trump unveiled his grand Liberation Day tariff agenda last week that erased $6 trillion in the biggest two-day wipeout after the announcement on Wednesday.
Wall Street clawed some of those losses back when the US reversed its position on tariffs a week later, but investor confidence in America being a reliable trading partner and a global investment destination is severely jolted.
Was a relief stock rally enough to restore their confidence? Has Mr Trump’s astonishing about-face, roughly 13 hours after tariffs at a 100-year high went into effect on 56 nations and the EU, done anything to convince investors otherwise?
Are the white-knuckle rides investors suffered over the past week over? Do they have an idea where the markets are heading now? The simple answer is no.
Uncertainty is still rife and investors, though rejoicing at the relief rally, are not sure what the days and weeks to follow will hold for them. The euphoria of Thursday's relief rally has already worn off, with markets slumping the very next day.
“Trying to predict the next minute in this market is nearly impossible,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, said. “The US has gone completely off-script. Donald Trump will go down in history as the most unpredictable US president at best – and at worst as the one who dismantled the very idea of American exceptionalism.”
Mr Trump on Wednesday ordered a 90-day pause on so-called reciprocal tariffs on all countries except China. The announcement followed warnings from Mr Trump’s billionaire backers and business leaders of a potential recession caused by the US administration's push for tariffs.
“I have authorised a 90-day pause, and a substantially lowered reciprocal tariff during this period, of 10 per cent, also effective immediately,” Mr Trump wrote on social media. However, he raised duties on Chinese imports from 104 per cent to 125 per cent after China increased tariffs on US goods to 84 per cent.
Treasury Secretary Scott Bessent later clarified that Mr Trump is maintaining the 10 per cent tariff on nearly all global imports. He said at the White House that the market did not understand the higher tariffs as “those were maximum levels”.
US financial markets rallied following the tariff suspension announcement and investors grabbed the buying opportunity with both hands after the biggest two-day wipeout in the history of US stocks last week, with a combined $6.6 trillion in value erased on Thursday and Friday.
The tech-heavy Nasdaq Composite Index ended trade with more than 12 per cent gains, while the S&P 500 Index surged 9.25 per cent, its best showing since the global financial crisis. The Dow Jones Index rallied 7.87 per cent. Shares in Asia joined the relief rally on Thursday and equities benchmarks in the Middle East and Europe posted sharp gains.
However, the sell-off on Wall Street and the broader Asian equity markets resumed on Friday.
“Market participants quite rightly rejoiced at the news in the hope that the delay will allow room for negotiation, compromise and an ultimate softening in the tariffs that would limit the global economic fallout,” said Matthew Ryan, head of market strategy at global financial services firm Ebury.
What forced the about-face?
However, “there are no guarantees with Mr Trump, Mr Ryan said.
On Thursday, a White House official clarified that the US tariffs on China are effectively 145 per cent as the 125 per cent "reciprocal" tariff rate comes on top of the existing 20 per cent tariff related to fentanyl trafficking.
yet it is “incomprehensible that the tariffs would remain in place at such devastatingly high levels”.
The implications are “profound” for the US economy, which would “almost certainly be staring down the barrel of recession”, which is “not exactly a black mark that the 47th president would want tarnishing his legacy”, he said.
Swissquote Bank said that more so than the economy, the actual red line was the sovereign bond markets as US Treasuries faced intense selling pressure over the past few days, which finally forced Mr Trump to take a step back from his tariff strategy.
“He didn’t care about the equity sell-off, he couldn’t care less about the global risk rout, and he was likely pleased to see Chinese assets and crude oil tank. But the fire sale in US Treasuries dialled up the pressure to a point that apparently became unbearable – even for Trump,” Ms Ozkardeskaya said.
Battle lines drawn
Beyond the financial markets, Washington’s push for tariffs has already forced US trading partners to draw the battle lines. Trade and investment priorities are being rehashed, new alliances and partners are being sought and sovereigns as well as corporates are picking and choosing which battles they need to fight and where they must surrender amid the tariff tumult.
There is a 90-day break, but the doubts of another about-face will linger in the investors’ minds. The results of trade skirmishes that have already taken place may not immediately be visible to the world, but they will affect long-term trade as well as investment strategies of sovereigns, corporate and institutional investors, especially those in Europe and broader Asia.
For now, Mr Trump will likely emerge triumphant in most tariff tiffs, simply by virtue of being the president of the world’s largest economy and the most valuable consumer market.
“There is no single consumer market as valuable as that in the US. This monopsony power is what President Trump is attempting to leverage, and it is not simply a case of Asian and European manufacturers finding other export destinations instead of the US,” Hasnain Malik, head of emerging and frontier markets equity strategy at Tellimer, said.
A public game of chicken
While the 90-day pause is a reprieve for most nations, the tariff temperature is rising with every passing day between the US and China, which has been very vocal in its criticism of Mr Trump’s approach to tariffs.
“The US threat to escalate tariffs against China is a mistake on top of a mistake, which once again exposes the US’s blackmailing nature,” China’s Commerce Ministry said on Tuesday. “If the US insists on its own way, China will fight to the end.” The ministry also said there were “no winners in a trade war”.
China raised the stakes on Tuesday when it increased duties on US goods to 84 per cent. Beijing’s head-on approach has clearly touched a nerve in Washington, which is now trying to make an example out of China. “Based on the lack of respect that China has shown to the world’s markets, I am hereby raising the tariff charged to China by the United States of America to 125 per cent, effective immediately,” Mr Trump said on Wednesday.
China has so far not matched the increase with its own duties on imports from the US. However, it said it would sue the US at the World Trade Organisation and added six firms to its unreliable entity list and 12 US companies to its export control list.
It is ironic that Europeans, who did retaliate to Mr Trump’s tariffs, will still benefit from the 90-day freeze, and that only China will face the consequences, according to Swissquote Bank. “It will be crucial to see how China reacts and whether the two sides are willing to compromise, at least temporarily,” Susan Joho, economist at Julius Baer, said.
Mr Ryan said engaging in the public game of chicken will have consequences for the global economy and world trade as well as the US economy. “Forecasts for the global economy had already undergone downward revisions since Trump’s tariff announcements, and they will no doubt be subject to many more, depending on where the average tariff rate ultimately ends up,” he said.
“While we see Asia as among the most exposed to a tariff-induced growth slowdown, the focus for now is clearly on the impact of the levies on the US economy, which will be hit by the double whammy of not only weaker sentiment, but higher inflation. It will be very interesting to see how the Federal Reserve responds to the stagflationary risks posed by the tariffs.”
