Introduction
Financial markets have grown accustomed to Donald Trump’s numerous and conflicting announcements regarding tariffs, and the panic triggered by his protectionist “Liberation Day” offensive in early April now seems to have subsided.
Market Reactions: Past vs. Present
On Saturday, Trump announced the imposition of 30% tariffs on goods from Mexico and the European Union imported into the United States, starting August 1st. However, on Monday, European stock markets only slightly declined.
“These tariffs are as high as in early April, but the market reaction is completely different,” explains Ipek Ozkardeskaya, Swissquote Bank analyst, interviewed by AFP.
On April 4th, following Trump’s announcement of a series of “reciprocal tariffs” targeting almost all US trading partners, European and US stock markets dropped between 4% and 6%, an unprecedented level since the start of the COVID-19 pandemic in 2020.
“TACO”
Despite several tariff announcements in recent days, targeting over a dozen countries and products like copper, “markets seem increasingly resilient,” summarizes Jim Reid, Deutsche Bank economist.
US indices have reached new historical highs, while European stock markets are once again attracting investors.
The Frankfurt Stock Exchange’s main index, the DAX, has risen over 20% since the beginning of the year.
Market Resilience: Reasons and Explanations
Firstly, markets are experienced with Trump’s course changes. The implementation of most tariffs has been postponed multiple times, allowing time to reach agreements with the affected countries.
Financial press has even given a name to these repeated course changes, downplaying the risk for investors: the “TACO” (Trump Always Chickens Out, or “Trump always backs down”, NDLR).
“Investors continue to bet on the TACO and the prolongation of negotiations,” opines Ipek Ozkardeskaya.
The absence of a European response at this stage has also calmed markets. European Commission President Ursula von der Leyen has chosen to maintain a low profile, hoping for an agreement that is less painful.
“Investors consider Trump’s tariff announcements more of a tactical lever than an immediate economic threat,” agrees Stephen Innes, SPI Asset Management, in an interview with AFP.
Market Patience: How Long Will It Last?
“Markets expect negotiations to continue,” explains Alexandre Baradez, IG France’s market analysis head.
However, this complacency may not last long. The August 1st deadline is being closely watched.
“Unlike previous postponed deadlines, this one seems truly firm,” estimates Jim Reid, Deutsche Bank economist.
“If massive tariffs are indeed applied on August 1st, during the summer season, markets could react violently,” adds Jim Reid.
Economic Impact of Existing Tariffs
The effects of tariffs already implemented by the Trump administration on the US economy are also being observed.
Tariffs, across all sectors, average over 16% on products entering the US market compared to less than 5% before Trump’s election.
“We will need to monitor upcoming consumer behavior and corporate results, which will provide insight into the consequences of this policy on the economy,” estimates Alexandre Baradez.
Markets fear that tariffs could increase the risk of “stagflation,” a combination of economic slowdown and rising inflation, preventing the US Federal Reserve from lowering rates to stimulate activity.
“The lack of market reaction widens the gap between how investors want to see reality and what the actual economic reality will be,” warns Ipek Ozkardeskaya.
