US President Trump Threatens Double Tariffs, Ignites Market Fears and Desensitization
The US stock market's recent record highs have been met with a warning from President Donald Trump, who has threatened to double the baseline universal tariff to 20%. This move is intended to dispel fears that tariffs would harm the global economy. However, financial markets have responded relatively mildly, indicating a level of desensitization to economic dangers.
Tariff Developments and Market Reactions
Trump's comments on NBC News Thursday revealed his consideration of a flat tariff of 15-20% on all trading partners, higher than the current 10% rate and analyst expectations. This was on top of new levies on Canada and followed steep rates on Brazil earlier in the week. Trump stated that he believes tariffs have been "very well-received" and that the stock market's record high is evidence of their success.
Despite this confidence, contracts for the S&P 500 and European stocks fell on Friday, while the dollar strengthened against most major peers and the yen fell. The US stock market's rise to a record high has not been smooth, with the S&P 500 nearly plunging into a bear market in April after Trump's "Liberation Day" levies.
Market Volatility and Risk Sentiment
The CBOE VIX index of US equity volatility dropped to its lowest level since February, indicating that markets have become less sensitive to tariff developments. However, this is not entirely consistent with the real-world picture, as Hebe Chen, an analyst at Vantage Markets in Sydney, noted: "Record highs and a low VIX signals markets have already priced in perfection — a soft landing and a clean unwind of tariff risks — which feels wildly out of sync with the real-world picture."
The S&P 500 Index set another record high on Friday, as did Bitcoin, often seen as a gauge of risk sentiment. However, Jamie Dimon, CEO of JPMorgan Chase & Co., has expressed concerns that markets are too complacent about the threats caused by rising trade frictions.
Tariff Fatigue and Policy Overload
Market participants may be experiencing "tariff fatigue," opting to stay out of major trades until some final news on tariffs. David Chao, a global market strategist at Invesco Asset Management, noted that there has been "so much policy overload, with constant updates, delays and new announcements that is creating a confusing environment."
Trump's Strategy: FAFO vs. TACO
US Treasury Secretary Scott Bessent spoke at a conference in Idaho on Wednesday, objecting to the notion of a so-called TACO trade, an acronym coined by a Financial Times columnist that stands for "Trump Always Chickens Out" in the face of market losses. Instead, he said Trump's strategy is more akin to FAFO, an acronym popular on social media that stands for "F—- Around and Find Out."
Global Economic Impact
The economic blow some feared at the start of the year has yet to materialize. Inflation in the US remains contained, and export figures from Asia have been propped up by a rush of shipments to beat the looming tariffs. However, a surge in Southeast Asia's exports amid frontloading is due for payback, threatening a hit to gross domestic product growth rates in the second half of the year.
Investor Reaction and Strategy
Marko Papic, chief strategist of GeoMacro at BCA Research, advises investors not to try to trade every single tweet or decision from Trump. He notes that the back-and-forth with tariffs is designed to accelerate deals and ensure that Trump can claim victories along the way.
Conclusion
The threat of double tariffs has ignited market fears and desensitization. While the US stock market's recent record highs have been met with a warning from President Trump, financial markets have responded relatively mildly. The economic blow some feared at the start of the year has yet to materialize, but investors should remain cautious as trade uncertainty and tariff developments continue to shape global economic trends.
Economic Indicators and Market Data
- S&P 500 Index: set another record high on Friday
- CBOE VIX index: dropped to its lowest level since February
- Dollar: strengthened against most major peers and the yen fell
- US stock market's rise to a record high has not been smooth, with the S&P 500 nearly plunging into a bear market in April after Trump's "Liberation Day" levies
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