WTF: Worldwide Trump Fallout

Investors worldwide will be wondering what on earth is going on in financial markets. Trump’s so-called Liberation Day turned out to be anything but. Markets were already nervous ahead of last Wednesday’s announcement, but the reality of the measures highlighted on Trump’s whiteboard exceeded worst expectations. In the following three days of trading (including today), markets have seen some of the biggest falls since the early days of the pandemic, and most commentators that I have read expect worse to come.

Understandably, investors are reeling not just from the announcement but also from its impact, principally on their equity portfolios, government bond markets, interest rate futures, and commodity and currency markets.

In my live stream on Friday, I talked at length about the announcement and my economic and market views. If you didn't catch it, I've included the replay below. Given what’s going on, I thought I should provide an update on what I said then, albeit it was only a few days ago.

First of all, I want to reiterate the key point: As alarming as Trump’s tariff announcement was, I do not expect it to tip the world economy into a recession, nor anything close. Clearly, it is a profoundly important geopolitical move that has ended over 70 years of moves towards global free trade and lower tariffs. But the announcement on Wednesday is the start of a process and by no means the final word. I understand that over 50 of the 60 specifically targeted countries have already commenced negotiations with the Trump administration with a view to agreeing better outcomes. I am sure this process will yield an improvement from the worst-case scenarios that markets are currently very concerned about.

Secondly, I fundamentally disagree with the reflex consensual views that these tariffs will trigger economy-wide inflation issues or, worse, a recession in the US or the UK or some more worrying and broader financial problems, for example, in the banking system.

On Friday, I highlighted an example from the car industry, which I think demonstrated that it’s way too early to conclude how businesses will respond to these tariffs and what their pricing decisions will be going forward. I also spoke about the substitution effects that will take place, which will reflect the relative price changes between imported and domestically produced goods in the US. I also highlighted the significant offsets we are already seeing in the form of lower bond yields, interest rate futures (signalling likely central bank cuts) and much lower oil prices (Brent is now below $68 a barrel, the lowest price since 2021, before the war in Ukraine). These effects should not be underestimated by investors and will, in my view, overwhelm the impact of the eventual tariff outcomes.

Thirdly, I wanted to mention again the situation in global equity markets. At times like this, investors tend to look to “markets” for a lead on the implications of the events that have just occurred. However, in my experience, it is precisely at times like this when markets give their most misleading signals. Instead of reasoned and balanced analysis focused on underlying facts, equity markets, in particular, have a habit of becoming hysterical and incredibly emotional. Rational analysis is often the first casualty in these situations. Inevitably, the media rapidly becomes a willing and enthusiastic participant in the hysteria as well. Typically, their first port of call is the aggregate losses in market value, and the bigger the number, the better. Lurid headlines then only add to the prevailing sense of crisis.

So, my advice is not to “listen” to the market. Contrary to popular opinion, it is not invested with superior information or insight. At times like this, investors should focus on rational and balanced analysis and avoid making irrational and ill-informed short-term decisions.

Given what I now know, I thought I should sign off this brief note with my own reasonably considered view. Based on what I believe we could consider to be the worst-case scenario, it is my judgement that the world economy is not tipped into recession by the Trump tariffs. Indeed, although I expect the US economy to slow this year, I still expect it to grow robustly by between 1.5 and 2%. Lower interest rates and energy prices are going to be a global stimulus that should not be underestimated.

The UK economy will not be affected by the tariffs at all. Given the importance of manufacturing exports to both economies, the EU and China will be more affected, but there will be important and significant offsets in both cases. For some of the 60 countries singled out on Trump’s whiteboard, the tariffs will be a major challenge, but in the first instance, I believe they will be negotiated down, and secondly, the most challenged are not significant enough to move the global economic dial.

Finally, my view is that global equity markets have passed their point of maximum panic. Consequently, I believe we have seen the lows, and I expect markets to regain some equilibrium in the days and weeks ahead. I would expect sentiment to remain fragile for a while as markets start to properly quantify the real impact of Trump’s tariff measures, but the initial consensus, as is so often the case in situations like this, is wrong.