Donald in the tariff wonderland

Trump’s “Liberation Day” swings the markets
China responds dearly in the runaway trade spat with the US
FED stays on the cautious side amid uncertainty
ECB continues lowering the interest rates

April has marked the first real shock of Trump’s presidency to the financial markets. Having announced the set of steep tariffs early in the month on the pre-announced “Liberation Day”, Donald Trump sent the markets on a roller coaster ride with confused global investors navigating the ride. As the extremely dynamic macroeconomic agenda keeps on changing by the day, this will shape the directions of the many asset classes for the foreseeable future.

With that in mind, the developed markets’ equities (measured by MSCI World index in EUR) have dropped by 4.13%, while emerging markets’ equities (measured by MSCI Emerging Market index in EUR) have lost 3.73%. During the same period yields on bonds were declining, with 10-year U.S. Treasury bond yields slightly decreasing to 4.18% from 4.2% a month ago, while German 10-year Treasury bond yields have declined to 2.44% from 2.73% a month ago.

Trump’s “Liberation day”

The announcement of the "Liberation Day" tariffs by President Donald Trump on April 2 had a major impact on the stock market. The tariffs included a universal 10% tariff on all imports, with higher rates targeting specific countries such as China and the European Union. This led to a significant decline in the US stock markets, with major indices dropping sharply. In the following days of the ”Liberation Day” announcement, the stock index S&P 500 has dropped over 10% with the matching shockwaves across the rest of the financial markets, including the US Treasury market and the falling value of the US dollar. Analysts estimate that the tariffs could cost each American household $5,000 per year, adding financial strain to millions and worsening the prospects of the US economy. While the financial markets have somewhat recovered from the initial shock reaction, the broader implications of these tariffs suggest a potential slowdown in economic growth and a challenging environment for businesses reliant on global trade.

S&P 500 index performance

Source: Bloomberg

China’s principled tariff response

Among the many countries’ imports Trump administration has imposed tariffs on, China stood out with the principled approach responding to additional tariffs by introducing its own tariffs on the US imports. This has led to a fiery exchange of trade spats and ever-heightening risks to the trade between the two countries as the headline tariffs swiftly exceeded 100%. As the Chinese economic growth of recent decades has largely rested on the exports, the worsening climate on the international trade inevitably undermines the prospects of the Chinese economy. As a result, thanks to escalating trade tensions with the United States, the Chinese stock market experienced significant turbulence. The CSI 300 Index dropped up to 8% in the aftermath of the “Liberation Day” in early April. Additionally, China's economic growth forecast was downgraded by UBS to only 3.4% for 2025, further dampening market sentiment. In response, the Chinese government has announced plans for additional stimulus measures to support the economy, while the financial markets have witnessed the increased buying participation by the so called “national team” (strategic companies that support the stock market prices by buying up the shares). Whatever the measures, investors are closely watching for any signs of resolution in the trade dispute, which could stabilize the market in the medium run.

ECB, FED decisions

Faced with the extremely dynamic economic circumstances, FED chair Jerome Powell has shared the insights on the announced tariffs so far being much worse than previously expected. As a result, this could potentially throw the US economy into stagflation scenario, with both economic growth slowing and inflation picking up the pace once again. The prospect of such dilemma would potentially put the FED in the precarious position having to prioritize in its mission to ensure the price stability and the economic growth. So far, the FED has decided not to change the interest rates in its April meeting. That, in turn, has attracted a sharp criticism of the FED chair by the President Trump through the multiple channels, indicating strong preference for a more aggressive interest rate cut trend from the FED. This vivid expression of preferences has additionally cautioned the investors, as the political interference in the monetary policy of the US may undermine governance framework of the country, implicating potential value losses to the US financial assets and the world’s no. 1 reserve currency – the US dollar.

For its part, ECB has cut its key interest rate by 0,25% to an all-new level of 2.25%, thus easing the monetary policy in the Eurozone, once again. Having reduced the interest rates for the seventh time, ECB president Christine Lagarde has provided the comments on the deteriorating prospects for economic growth in the face of rising trade uncertainty. Drawing their conclusions from the highly expected ECB decision, investors are expecting 2-3 more interest rate cuts in the Euro area this year.

Market view

April’s “Liberation Day” may have been a defining moment for the rest of the year, as tariff announcements, amendments and postponements are going to captivate the investors’ attention in the coming months. On the bright side of things, it is still noted to some extent that the present US presidential administration is not willing to risk the medium term economic prospects in the name of implementing its long term trade policy. With that said, it is clear the President Trump intends to re-shape the existing global trade patterns. This back-and-forth of the “vision vs reality” contest is going to keep the volatility elevated until the updated framework takes shape.

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