Stock markets are trading on guesswork when pricing risk of 'economic nuclear winter'

What is the correct level of fall in the stock market if the US president declares economic war on the rest of the world even at the risk of causing a recession in his own country? Does 10% capture it? Or 12%, which was roughly the S&P 500 index's three-day decline by the time the London market closed yesterday? Or 15%? How about 20%? More? A lot more?

- Nils Pratley

During three straight days of heavy falls in share prices everywhere, a striking feature has been the absence of wise old market heads popping up to argue that the panic is perhaps a little overdone and fair value is emerging. Instead, the collective mood is stuck in bewildered mode for understandable reasons.

First, Donald Trump shows no sign of softening his language, which would be the first step towards softening his policy on tariffs. Rather, his weekend comments – "sometimes you have to take medicine to fix something" – were intransigent. Unlike others in the administration, he didn't choose to emphasize that the tariffs are the opening shot in a negotiation. He simply said the nasty-tasting stuff must be swallowed.

It remains hard to believe he won't change tone if the damage to Americans' 401k pension plans becomes substantially more severe, but one cannot be certain.