Trump’s tariff policies continue to have a destabilising effect on markets, with investors left guessing as to which measures will either be added or walked back next. The latest example of this occurred on Tuesday, where threats were made by the US President that tariffs on Canadian steel and aluminium imports would double from 25% to 50% in reaction to a proposed surcharge from the Canadian side on electricity exports to the US. But discussions behind the scenes diffused this escalation somewhat, and now we are back to 25% tariffs and no surcharge on electricity from Canada to the US.
Another factor adding to market uncertainty around the tariff story is that reciprocal tariffs from the US are due on April 2nd, and as yet we don’t know which countries and products will be affected or which may escape with exemptions. Many of the ‘blanks’ are yet to be filled in regarding how the tariff policy will eventually take shape and as such the specific economic consequences are hard to compute.
Economic instability resulting from aggressive tariff measures is one of the immediate effects, but whether a recession awaits down the road is another matter and probably too early to call. The current macro data doesn’t appear to suggest it, at least (US non-farm payrolls data was decent if not great last week, and GDP remains above 2%). How long the trade war lasts and how extreme the final tariff measures are will determine whether a recession enters the equation.
The calculation from Trump appears to be that now represents the best window of opportunity to implement structural economic change – early in his second term and with enough time for the economy to recover from a turbulent period well ahead of the midterm elections in 2026. Time will tell if things go according to plan for the US President.
In commodities, gold has performed steadily if not spectacularly even though risk aversion is a theme that generally suits the precious metal. While equity markets have been in panic mode, gold has only found relatively muted demand this week so far, with news that Ukraine has accepted the terms of a US ceasefire proposal limiting some of the safe-haven demand. Gold was seen trading at $2916 in early trade on Wednesday, with resistance at $2936 and $2953, and support waiting at $2895 and $2868.
Oil is finding upside moves difficult ahead of an expected increase in OPEC+ production in April, while moves towards a ceasefire in Ukraine are also containing risk premium. The WTI (US) contract sits at $66.34, ahead of support at $65.40 and below resistance at $67.35 and $68.
In FX, rising Japanese and German bond yields are serving the yen and euro well against the USD. Hawkish Japanese interest rate expectations and fiscal spending and defence plans from Germany have contributed to the yen appreciating 6.3% this year versus the Dollar, while the euro has gained 5.4%. This, combined with US economic worries has pressured the Dollar Index (DXY) which is now trading at around its lowest since last November.
Whether the USD can stage a rebound may come down to US inflation data this week, with CPI (due Wednesday) and PPI (due Thursday). Current futures pricing suggests that a Fed rate cut may occur in June, however any upside surprise in the inflation data this week could push out that timeline. Such an outcome may assist the Dollar though it might not be great news for equity markets and risk assets. With financial markets fretting about the prospect of tariff-induced growth slowdowns, any signs that inflation is gaining momentum may just be rubbing salt into the wounds.
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