[SINGAPORE] More than a month after US President Donald Trump’s “Liberation Day”, he is giving the world a glimpse at what it will take to get him to relent on the hefty tariffs he has slapped on most of America’s trading partners.
And the mood in the market seems to be improving.
Last week, the US and UK announced an “economic prosperity deal”, in what could be the first of a number of similar agreements with other nations.
The US and China also began trade discussions over the weekend in Switzerland, with Trump floating the possibility of cutting US tariffs on Chinese goods if the talks are substantive.
BT in your inbox
Start and end each day with the latest news stories and analyses delivered straight to your inbox.
It is not clear that these trade talks and deals will improve the outlook for the global economy any time soon, of course. Indeed, US Treasury Secretary Scott Bessent said last week that the US-China talks will initially focus on de-escalating the tensions between the two nations.
Some market watchers have also pointed out that the US-UK Economic Prosperity Deal is still a work-in-progress that could take months or even years to complete.
Moreover, if the US maintains its baseline reciprocal tariff of 10 per cent on its trading partners, it would represent long-term headwinds for global trade.
On the other hand, quickly announcing a string of unfinished trade deals could give Trump the pretext he needs to roll back his tariffs if the economic pain becomes too much for the American electorate to bear.
This notion that the steep tariffs will somehow not be enforced if the going gets tough is perhaps why market sentiment seems to have improved. After tumbling more than 12 per cent over just four trading sessions following Liberation Day, the S&P 500 has regained almost all the ground it lost.
The benchmark US stock index ended last week at 5,659.91 – just 0.2 per cent below where it closed before the Liberation Day tariffs were announced.
Even the US dollar index (DXY), which measures the greenback against a basket of six major currencies, appears to be finding its feet after dropping below the 100 level in the wake of the Liberation Day tariffs.
The DXY ended last week at 100.42 – down about 3.3 per cent since Apr 2, and down 7.4 per cent since the beginning of this year.
Will news of more trade deals between the US and other major economies push US stocks higher, and further strengthen the greenback? Is it just a matter of time before Trump lifts his Liberation Day tariffs altogether?
Or, is the recent upturn in the S&P 500 a dead cat bounce?
Waiting for the fallout
The impact of Trump’s tariffs is, conceptually, quite straightforward. For most trade-oriented economies in Asia, the tariffs would essentially amount to a major demand shock. For the US, the impact is likely to be a significant supply shock as well as a demand shock.
Yet, until the full impact of the tariffs becomes evident, it is hard for economic policymakers, corporate leaders and investors to know exactly how to react. In fact, the economic data might initially paint a confusing picture.
On Apr 30, the US Bureau of Economic Analysis said US gross domestic product in Q1 2025 shrank 0.3 per cent. A significant contributor to the fall in GDP was a spike in imports.
US Federal Reserve chairman Jerome Powell said last week that the import surge was likely to have been driven by businesses bringing in goods early to avoid the increased tariffs.
He added: “Private domestic final purchases – which excludes net exports, inventory investment and government spending – grew a solid 3 per cent in Q1 2025, the same as last year’s pace.”
Powell also warned that Trump’s tariffs could put the Fed’s dual-mandate goals of maximum employment and stable prices in conflict. This could complicate the Fed’s policy path in the months ahead.
“If the large increases in tariffs that have been announced are sustained, they are likely to generate a rise in inflation, a slowdown in economic growth and an increase in unemployment,” he noted.
The US central bank said last week that it would maintain the target range for the federal funds rate at between 4.25 and 4.5 per cent.
Powell said this policy rate is “in a good place” as the Fed awaits further clarity on the tariffs and their impact on the US economy. But he declined to hazard how many rate cuts participants at the Fed’s next meeting in June will pencil in for the rest of the year.
The median projection of participants at the March meeting was that there would be two 25-basis-point rate cuts in 2025.
It isn’t just the Fed that is adopting a wait-and-see approach. While many companies guided for weaker profitability in the months ahead when they reported their Q1 2025 financial numbers, some – including Ford, Mattel and UPS – declined to provide any updated guidance in light of all the uncertainty.
Time to sell America?
This column was similarly circumspect immediately after the announcement of“Liberation Day”tariffs, arguing that investors should not rush to take advantage of the sell-off as the full impact of Trump’s tariffs and any retaliatory action might not become clear for several months.
A week later, after a 90-day pause on the individualised reciprocal tariffs for all countries except China was announced, this column came to the view that Trump does not really have the stomach for the economic fallout that his trade policies are likely to bring. It also noted that new opportunities for investors might emerge in Asia as the region’s trading relationship with the US evolves.
With the S&P 500 now back at its pre-Liberation Day levels, I’m inclined to use the opportunity to lighten my exposure to the US market. As I noted in the Mark To Market podcast last week, even if Trump eventually backs away from his tariffs, all the nervousness he has created could weigh on the US economy and market for some time.
This is no longer an unconventional view. By many accounts, Asian investors, spooked by the seeming capriciousness of the Trump administration, have been pulling out of the US market in favour of Europe and China – or simply cash and gold.
With the S&P 500 still trading at higher earnings multiples than the Stoxx Europe 600, the Nikkei 225 and the Hang Seng Index, this flow of capital away from the US could continue for some time.
