Rough week for stockmarkets as US ramps up tariff plans

From China to Europe, and Mexico to Canada, the tariff headlines came thick and fast out of the US this week.

After diving 1.6 per cent on Thursday, the S&P 500 was down 2.5 per cent for the week. Picture: Getty Images

It was a rough week for markets as investors flocked from stocks to bonds.

Most of the risk aversion was caused by the re-escalation of tariff threats by the US administration, as well as disappointing US economic data and less “magnificent” results from tech giant Nvidia.

US PCE inflation data on Friday was another hurdle to jump.

And a US Securities and Exchange Commission filing raising concern about a private credit exchange traded fund that was launched this week by Wall Street giants State Street and Apollo Global Management added to the caution in Friday’s Asia-Pacific trading.

After diving 1.6 per cent on Thursday, the S&P 500 was down 2.5 per cent for the week.

The US stock benchmark erased all of its year-to-date gains of as much as 4.5 per cent.

Similarly, Australia’s S&P/ASX 200 lost 1.5 per cent for the week and briefly erased all of its year-to-date gain. The ASX fell as much as 5.3 per cent from a record high of 8615.2 two weeks ago.

After hitting a three-month high of US64.09c, the risk-sensitive Australian dollar fell 3.1 per cent to US62.10c as tariff news fuelled global economic growth concerns and risk aversion.

The US 10-year bond yield fell 20 basis points to a near three-month low of 4.22 per cent.

From plans to slap 25 per cent tariffs on copper and the EU imports, boost China tariffs by another 10 per cent and go ahead with the already announced but delayed 25 per cent tariffs on Canada and Mexico next week, the US tariff headlines came thick and fast this week.

There were also positive headlines on Ukraine in terms of peace prospects that could stem from any agreement between US President Trump and Ukrainian President Zelensky at their meeting on Friday.

In the six weeks since Trump’s inauguration, some tariffs have been delayed or cancelled when concessions have been made. But in recent days, the US President has tested the assumption in markets that he wouldn’t be prepared to sacrifice much if any strength in US stocks.

There has been some discussion about whether the US administration cares more about the US 10-year bond yield than the S&P 500 at this point. If that’s the case, then stocks can fall further.

“At the start of his term, most believed that a ‘Trump Put’ (option) was present,” Michael Brown, a senior research strategist with Pepperstone, said.

The assumption has long been that because Mr Trump gauges his success based on how US stocks are performing and how rapidly the US economy is growing, the administration would pivot its policies were either of those unofficial aims to come under threat.

“In essence, if stocks sell off enough, Trump will change course,” Mr Brown said.

“It is not opinion polls that are the yardstick, but how Wall Street is feeling.”

That assumption will be seriously tested if the S&P 500 falls any more than the standard 10 per cent “correction” – something not seen since 2023 – and Trump doesn’t change course on tariffs.

In terms of the US economic outlook, the administration’s efficiency drive, led by Elon Musk’s DOGE, could present a short-term risk as it aims to cut government spending, and stamp out perceived waste within federal agencies, albeit in the longer-term it could boost productivity.

“Thus far, it seems that the narrative around DOGE trumps the actual impact that the agency has had, though that could change as time goes on, and the magnitude of spending cuts grows,” Mr Brown said.

By terminating about 200,000 workers on probationary contracts and with 75,000 having signed up for voluntary redundancy packages, the layoffs have a significantly negative economic impact.

“Naturally, this raises the risks of a horrifically large rise in jobless claims, and potentially even a negative non-farm payrolls print at some stage,” Mr Brown added.

Meanwhile, the US Federal Reserve is taking a cautious approach to further interest rate cuts as officials look to gauge the inflation impact of Trump’s tariff policies.

If the US economy really is starting to weaken as recent sentiment indicators suggest, the risk is that such inflation concerns could make the Fed too slow to act with further rate cuts.

In that case, the stockmarket would be an obvious casualty, while long bonds would outperform.

But at this stage analysts remain convinced that Trump’s bark is worse than his bite.

“That said, the narrative on this front could well be shifting soon, particularly with the much-touted idea of reciprocal tariffs seemingly much more focused on equalising trade deficits, as opposed to furthering certain political aims,” Mr Brown said.

While reciprocal tariffs aren’t due to start before April, the inclusion of VAT and other non-tariff barriers in calculating the levies that the US, by virtue of Commerce Secretary Lutnick, will apply, means that the levies in question could well prove much larger than markets have discounted thus far, in turn posing a significant upside risk to inflation, and downside risk to economic growth.

“All of these potential growth-harming policies come before one considers efforts to cut the budget deficit to 3 per cent of GDP, from the current 7 per cent, potentially by the end of 2026,” Mr Brown said. “Cutting the deficit by 400 basis points in such a short space of time will require a degree of spending cuts and economic damage that would make prior recessions look like a walk in the park.

“The assumption that the short-term pain threshold is a low one is now starting to be challenged, even if current economic fundamentals still look solid. If, or when, these fundamentals weaken is the ‘acid test’ – does that prompt a pivot, or does that see Trump and Co. double down?

“The market’s assumption will likely be tested soon enough, though the Administration’s degree of stubbornness is a tail risk that seems underpriced for the time being.”

Originally published as Rough week for stockmarkets as US ramps up tariff plans