Investors head into Trump tariff deadline benumbed and blase

Pause on Trump's April 2 tariffs expires on Wednesday

Singapore/New York: Global investors are heading into US President Donald Trump's Wednesday deadline for trade tariffs palpably unexcited and prepared for a range of benign scenarios that they believe are already priced in.

Just days before the end of a 90-day pause he announced on his April 2 "Liberation Day" tariffs, Trump said the first batch of letters outlining the tariff levels they would face on exports to the United States would be sent to 12 countries on Monday.

Investors who have been tracking this date for months expect more details to emerge in the coming days and protracted uncertainty too, anticipating Trump will not be able to complete deals with all of America's trading partners in the coming week.

And they are not overly concerned.

“The market has gotten much more comfortable, more sanguine, when it comes to tariff news,” said Jeff Blazek, co-chief investment officer of multi-asset at Neuberger Berman in New York.

“The markets think that there is enough ‘squishiness’ in the deadlines – absent any major surprise – to not be too unsettled by more tariff news and believe that the worst-case scenarios are off the table now.”

Both the tariff levels and effective dates have become moving targets. Trump said on Friday that tariffs ranging up to 70 per cent could go into effect on August 1, levels far higher than the 10 per cent-50 per cent range he announced in April.

So far, the US administration has a limited deal with Britain and an in-principle agreement with Vietnam.

Deals that had been anticipated with India and Japan have failed to materialize, and there have been setbacks in talks with the European Union.

World stocks are meanwhile at record highs, up 11 per cent since April 2. They fell 14 per cent in three trading sessions after that announcement but have since rallied 24 per cent.

"If Liberation Day was the earthquake, the tariff letters will be the aftershocks. They won’t quite have the same impact on markets even if they are higher than the earlier 10 per cent," said Rong Ren Goh, a portfolio manager in the fixed income team at Eastspring Investments in Singapore.

"This financial system is so inundated with liquidity that it is hard to cash up or delever at the risk of lagging the markets, with April serving as a painful reminder for many who derisked and were then forced to chase the relentless recovery in the subsequent weeks."

Taxes and the Fed

Investors have also been distracted by weeks of wrangling in Congress over Trump's massive tax and spending package, which he signed into law on Friday.

Stock markets have celebrated the passage of the bill, which makes Trump's 2017 tax cuts permanent, while bond investors are wary the measures could add more than $3 trillion to the nation's $36.2 trillion debt.

The SP 500 and Nasdaq indexes closed at record highs on Friday, notching a third week of gains. Europe's STOXX 600 benchmark is up 9 per cent in three months.

But the risks of tariff-related inflation have weighed on US Treasuries and the dollar, and jostled expectations for Federal Reserve policy. Rate futures show traders no longer expect a Fed rate cut this month and are pricing in a total of just two quarter-point reductions by year-end.

The dollar has suffered a knock to its haven reputation from the dithering on tariffs. The dollar index, which reflects the US currency's performance against a basket of six others, has had its worst first half of the year since 1973, declining some 11 per cent. It has fallen by 6.6 per cent since April 2 alone.

"The markets are discounting a return to tariff levels of 35 per cent, 40 per cent or higher, and anticipating an across-the-board level of 10 per cent or so,” said John Pantekidis, chief investment officer at TwinFocus in Boston.

Pantekidis is cautiously optimistic about the outlook for US stocks this year, but the one variable he is watching closely is interest rate levels.

For now he expects to see interest rates dip in the second half, “but if the bond market worries about the impact of the bill and rates go up, that’s a different scenario.”