As the world navigates the complex landscape of international trade, United States (US) President Donald Trump has been at the forefront of news headlines. Initially, investors viewed Trump’s tariff threats as a negotiating tactic to secure better trade deals. However, with the recent implementation of tariffs on major trading partners like Mexico, Canada, and Europe, investor sentiment has shifted dramatically. The realisation that these tariffs are not just a bluff but a tangible economic policy has led to a significant change in investor behaviour and market dynamics.
Initial perception: tariffs as a negotiating tool
When Trump first took office, his aggressive trade rhetoric was seen as a strategy to renegotiate existing trade agreements. Many believed that the threats of tariffs were merely a ploy to bring other countries to the negotiating table. This perception was supported by Trump’s ability to rather quickly let Mexico, Canada and Colombia concede to some of the requests made in an effort to avoid tariffs. While there was some uncertainty created by these threats, which led to investment caution, investors remained, overall, rather optimistic.
Shift in sentiment: tariffs become reality
The recent implementation of substantial tariffs on imports from Canada, Mexico, China and Europe, as well as a universal tariff on both steel and copper, has marked a turning point. Investors are no longer viewing these actions as mere posturing but as a genuine shift in US trade policy. For example, Trump recently followed through with imposing a 25% tariff on imports from Canada and Mexico, and doubled the tariff on Chinese goods to 20%. These tariffs have triggered a wave of retaliatory measures from affected countries, escalating into a full-blown trade war on a global scale, which has led to significant market volatility.
The VIX Index, often referred to as the fear index, has soared to levels not seen since late December 2024 and major stock indices have experienced sharp declines, with the S&P 500 dropping by 6.8% over the past month and the Nasdaq Composite experiencing its worst performance since 2022.
Market reactions and economic concerns
The immediate market reaction to Trump’s tariff announcements has been decidedly negative. The S&P 500 and Nasdaq Composite have experienced significant declines, which are reflecting investor fears about the potential for stagflation or a recession. Economic indicators and forecasts are now suggesting a slowdown in economic growth, further exacerbating these concerns and eliminating the “American Exceptionalism” narrative. For example, the Atlanta Federal Reserve’s (Fed’s) gross domestic product (GDP) forecast has been downgraded, and consumer confidence has taken a hit, with global non-profit think tank the Conference Board’s Consumer Confidence Index experiencing its largest monthly decline since August 2021.
The imposition of tariffs acts as a tax on imported goods and typically leads to higher consumer prices and reduced purchasing power. This scenario triggers a cycle of reduced consumer demand, layoffs, and decreased economic activity, ultimately increasing the risk of a recession. Non-profit research organisation the Peterson Institute estimates that these tariffs could cost the average US household $1,200 annually.
Retaliation and global trade dynamics
The response from trading partners has been swift and decisive. Canada has announced retaliatory tariffs on US goods worth approximately $20 billion, targeting products such as computers and sports equipment. The Canadians have also opted to pursue a large-scale boycott of US goods. The European Union (EU) plans to implement counter-tariffs on American products valued at about $28.33 billion, starting in April. This tit-for-tat approach has heightened global trade tensions, which will lead to long-term consequences for global economic growth and consumer prices. The EU’s planned tariffs underscore the determination of trading partners to defend their interests in the face of US protectionism.
A new era in trade policy
The evolution of investor sentiment around Trump’s tariffs reflects a broader shift in how the world views US trade policy. What was once seen as a negotiating tactic is now recognised as a core component of US economic strategy. As investors navigate this new landscape, they must contend with increased volatility and uncertainty. The path forward will depend on how effectively policymakers can manage these tensions and find a balance between protecting domestic industries and maintaining a healthy global trade environment.
A LOOK AT THE MARKETS
Key market drivers this week:
- US inflation data surprised with Wednesday’s softer-than-expected consumer price index reading reigniting expectations for rate cuts by the Fed, providing relief to equity markets and boosting tech stocks.
- Major technology stocks like Tesla and Nvidia experienced sharp moves, with Tesla rebounding higher midweek after its steep losses earlier in the week.
- Crude oil traded at its lowest levels since December 2024 due to concerns over global demand and increased supply from the expanded Organisation of the Petroleum Exporting Countries, OPEC+.
- US Treasury yields dropped significantly amid recession fears, while German Bund yields surged following announcements of fiscal stimulus measures.
- Currencies fluctuated as the US dollar strengthened slightly against major currencies, while the euro gained on optimism surrounding EU fiscal stimulus plans.
Stock market volatility remains at large
Global equity markets faced significant volatility this week, driven by inflation data and geopolitical uncertainty. The S&P 500 dropped 1.4% on Thursday, extending its weekly decline to over 5%, its worst performance since June 2022. The index is now nearly 10% lower than its highs witnessed in February. The Nasdaq Composite Index saw sharp losses earlier in the week but rebounded midweek, led by tech stocks like Nvidia, which gained 6.4% to trade 2.6% higher for the week, and Tesla, rebounding by 7.6% after plummeting 15.4% on Monday. European equities blew off steam, shedding nearly 2.8% for the week and ending in the red on Thursday. The FTSE 100 traded sideways as mixed sentiment prevailed in the United Kingdom (UK) economy.
Investors flock to bonds
US Treasury yields dropped significantly as recession fears deepened. The 10-year US Treasury yield fell to 4.23%, down from last Friday’s close of 4.32%, marking its lowest level since October 2024, before reaching 4.29% towards the end of the week. Investors have recently flocked to Treasuries amid heightened uncertainty surrounding President Trump’s tariff policies and their potential inflationary impact. German Bund yields eased to 2.8% on Monday but remain at historically high levels.
Gold glitters at fresh record highs
Gold prices continued their upward trajectory, reaching fresh all-time highs on Thursday as investors sought refuge in safe-haven assets amidst market volatility and geopolitical uncertainty. Gold futures traded at $2,989.74/ounce this morning, up 2.7% for the week. Conversely, oil prices suffered sharp declines due to fears of slowing global demand exacerbated by US-China trade tensions and weaker economic data from China. Brent crude fell below the $69/barrel on Tuesday, before rebounding to just above the $70/barrel mark this morning, gaining some traction as the Ukraine ceasefire deal remains uncertain.
Currencies weary of trade tension
The US Dollar Index edged higher this week, trading at 104 this morning amid trade war escalations. Analysts now expect little change to this level through to quarter-end. The euro had a mixed performance against the dollar amid concerns over retaliatory trade tariffs from the European Union set to take effect next month. The euro traded at $1.08/€ on Thursday morning after briefly touching $1.09/€ earlier in the week. The pound weakened against the dollar due to ongoing fiscal-related uncertainty and subdued economic data from the UK.
Key indicators:
GBP/USD: 1.2946
GBP/EUR: 1.1929
GBP/ZAR: 23.59
GOLD: $2,983.58
BRENT CRUDE: $70.51
Please note that there will be no Weekly Wrap on 21 March 2025 due to the Human Rights Day public holiday.
Sources: Bloomberg, Reuters, LSEG Workspace and Trading View.
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.
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