Trump’s tariffs gambit puts investors on edge as deadline looms
US President Donald Trump looks to push back the tariffs deadline but threatens rates up to 70 per cent, while economists warn of stagflationary risks.
Business
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It’s a big week for US trade policy as Wednesday’s deadline for so-called “reciprocal tariffs” looms, with markets bracing for President Donald Trump’s next move in his escalating trade war.
Positively for risk assets, Mr Trump has already seems to have pushed the start date for country-specific tariffs above the 10 per cent baseline from July 9 to August 1. By itself, that could have fired up the so-called TACO (Trump always chickens out) trade in markets.
But Mr Trump also said he plans to start unilaterally setting tariff rates on Monday for countries that haven’t struck deals with the US – threatening rates ranging from 10 to 70 per cent. He indicated Japan would be among those countries, calling it “very spoiled” for refusing US rice imports.
If major trading partners like the EU, Japan and India face such increases, markets could sell off sharply.
The reality is, the US Administration doesn’t have anywhere near the number of trade deals it touted in May and June. So far, the US has only announced deals with the UK and Vietnam, plus a trade framework with China that slashed retaliatory tariffs. The UK deal wasn’t comprehensive, Vietnam hasn’t publicly agreed to Mr Trump’s “deal”, and the US has refused to release details of its China pact.
Last week, India told the World Trade Organisation it has prepared retaliatory duties against US goods in response to Washington’s auto tariffs.
On Monday, Mr Trump said countries aligning with BRICS policies would face an extra 10 per cent tariff, after the bloc warned of “unjustified unilateral protectionist measures” that threaten to disrupt the global economy.
Mr Trump’s recent modus operandi suggests these tariff letters are more “stick” than substance – a negotiating tactic accompanied by endless deadline delays. Certainly that was the case when markets crashed in early April. After a 20 per cent fall in the S&P 500, the so-called “Trump put” option was struck right on cue.
Whether that safety net remains after the subsequent 30 per cent rebound is questionable. Logic suggests the S&P 500 is now way above the strike price of the “Trump put”.
Markets appear to be assuming average reciprocal tariffs will settle around 20 per cent. If that plays into Mr Trump’s thinking, he may push for greater increases – not just to pressure countries but to raise revenue, given the US economy still looks strong with inflation under control.
As for Tuesday’s Reserve Bank interest rate decision, there’s still plenty of “uncertainty about the final scope of tariffs and policy responses” that fed into May’s cut. The market fully expects a 25 basis point reduction, the RBA has only just hit the top end of its neutral rate estimates.
JP Morgan’s head of global equity strategy Mislav Matejka has warned that while market positioning suggests the “pain trade” remains to the upside, investors shouldn’t discount stagflationary risks by continuing to drive up share prices.
“Investor positioning remains lighter than at the start of the year, suggesting the pain trade is still higher,” he said. “But will the Goldilocks narrative get confirmation during summer, or will stagflationary risks increase?”
While the biggest tariff increases in over 70 years haven’t yet shown adverse economic impact, JP Morgan economists expect US growth rates to halve to 1 per cent in the second half of 2025, with inflation picking up.
Front loading of orders ahead of tariffs will likely have a “payback”, reducing consumer purchasing power. Even with dramatic back-pedalling, the current tariffs picture is much worse than most expected.
Matejka sees risks of stagflation, pressure on Federal Reserve credibility if it keeps cutting while inflation rises, and upward pressure on bond yields given fiscal deficits exceeding 7 per cent.
“Post the V-shaped equity rebound, investor sentiment is clearly more complacent, with markets appearing overbought,” he said.
Consensus estimates of 10 per cent US earnings per share growth in 2025 and 14 per cent in 2026 look “elevated in light of slowing activity”, while at 22 times earnings, the S&P 500’s valuation “remains stretched” compared to cheaper international markets.
The coming week will test whether Mr Trump’s tariff brinkmanship can continue to coexist with buoyant markets, or whether reality finally bites.
Originally published as Trump’s tariffs gambit puts investors on edge as deadline looms
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