Trade deal euphoria blind to tariff reality

The optimism sweeping world stock markets following news of emerging and expected US trade deals is undeniable and understandable. But it is also puzzling.

- Jamie McGeever

The S&P 500, Britain’s FTSE 100 and the MSCI All Country index have powered to new highs this week, and other global benchmarks are not far behind. Analysts at Goldman Sachs and other big banks have recently been raising their year-end S&P 500 forecasts by as much as 10%.

The catalyst is clear: baseline tariffs on imported goods into the US will be much lower than the duties President Donald Trump had threatened previously. It emerged past week that the levy on Japanese goods will be 15%, not 25%, and indications are that a deal with the European Union will land on 15% too. That's half the rate Mr Trump had threatened to impose.

Suddenly, the picture is nowhere near as bleak is it looked a few months ago. Economists reckon that the final aggregate US tariff rate will settle around 15-20% once deals with Brussels and Beijing are reached, a level markets are betting won't tip the economy into recession.

This suggests that Mr Trump's seemingly chaotic strategy — threaten mutually assured economic destruction, extract concessions and then pull back to limit the market damage — is paying off. But will it?