A tariff 'doom loop' for equities

The astonishing rebound in stocks since early April largely reflects investors’ bet that US President Donald Trump won't follow through on his tariff threats.

- Jamie McGeever

But the market's very resilience may encourage the president to push forward, which could be bad news for equities in both the US and Europe.

Investors appear to believe that the April 2 “reciprocal” tariffs were mostly a tactic to bring countries to the negotiating table, and Washington's levies will end up being much lower than advertised. Tariffs may end up much higher than they were before Mr Trump's second term began, but the situation will still be better than the worst-case scenarios initially priced in after Mr Trump’s so-called “Liberation Day”.

Monday's equity moves were a case in point. Mr Trump's threat on Saturday to impose 30% levies on imports from the European Union and Mexico — two of America’s largest trading partners — was met with a collective market shrug. European and Mexican stocks dipped a bit, but Wall Street closed in the green and the Nasdaq hit a new high.

This follows threats in recent days to place a 50% tariff rate on goods imported from Brazil and a 35% levy on goods from Canada not covered under the USMCA agreement. Brazilian stocks have slipped 5%, but Canadian stocks have hit new peaks.

The question now is whether the line between complacency and the “TACO” trade — the bet that “Trump always chickens out” — is getting blurred.