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President Donald Trump was expected to be friendly to the stock and bond markets. He had widespread support and funding from Wall Street investment banks and hedge funds and it was assumed he wouldn’t do anything to economically harm his voters and financial backers. That is why the events of Liberation Day on April 2nd were so shocking. Trump’s administration introduced aggressive tariffs that significantly diverged from the expectations set by his previous rhetoric. This abrupt shift raised alarm bells in the financial community as the tariff announcements exceeded the most pessimistic scenarios anticipated by the market. The ensuing market turmoil seems to have been exacerbated by a hedge fund or even multiple funds having to force-sell in order to meet margin calls on highly geared derivative positions. Just before the initial seven-day deadline expired, the true “horse trading” began with a new 90-day extension granted for all except China, to allow time to agree on trade deals. This confirmed the suspicion that Trump hasn’t torn up the rule book and that all this is just deal-making tactics from a man who isn’t a politician or diplomat but a seasoned real estate trader. With the benefit of hindsight, it was highly probable that this would be the case, but markets have to price on the available information at that time. Markets now face two trade wars: one with China and another with “the rest.”
Why has Trump done this and why now?
He promised it.
It was a key policy as part of his Presidential Election campaign and he has to introduce tariffs, whether he retains them depends upon the economy. The issue is that almost no economists or business leaders support them. The economic consequences are likely to be higher prices, increased unemployment and slower economic growth as the consumer goes on strike i.e. the dreaded “Stagflation.”
To bring manufacturing back to America.
A noble aim and one that resonates with his voter base. However, the costs associated with re-establishing production in a higher wage, full employment economy where real estate is expensive and like the UK, mired with complex planning and construction rules does not make economic sense. Labour is scarce and may lack the necessary skills. It will be costly and key components will still have come from abroad and be taxed. For many businesses finding an even cheaper country to manufacture and absorb the tariff cost is likely to be the best option. Even if production does move back to the USA, it will take many years to come on stream. Some could boost production from existing US sites e.g. Airbus, BMW but they are the exception and will still face tariffs on component imports. So it is highly probable that tariffs will not lead to much manufacturing moving to the USA during the term of this Presidency, possibly by year four, certainly not in time for the mid-term elections. Companies are very good at promising and then quietly forgetting.
Why now and what’s the rush?.
Trade Agreements usual take years and even decades to negotiate, the Brexit terms are still being talked through! There is clearly merit in creating chaos and disruption as it does seem to be short-circuiting what is normally a very lengthy and complex process. The first deal should be the key, as this could set the template for all the others. As we also know from the Brexit talks nothing is likely to be fully agreed until the very last minute. Japan, India, South Korea and Vietnam seem to be first in the queue. A clear message to China? If he succeeds in agreeing to such a large number of free trade deals in 90 days it will be truly unprecedented and positive.
Political timing is important as well.
The US mid-term elections are due in November 2026. Trump cannot afford to lose either or both Houses of Congress. He needs to get his radical agenda done and proving a success very quickly, hence the rush. He is also flirting with recession and increased unemployment. Empty shelves at Thanksgiving 2025 will be unacceptable to US consumers. Hence trade deals by July, for shipping in August/September, with goods on US retailer shelves in October seems about right?
What if it goes wrong?
Trump isn’t a politician, thus he doesn’t care about the optics of U-turns. Especially if there is someone he can blame, the Ukraine peace talks is a classic example. There are a number of architects of the tariff strategy Peter Navarro, Howard Lutnick and Stephen Miran that can be blamed should the US economy nosedive, as many economists expect if no trade deals are done. Markets thus believe that if the US economy collapses Trump will not hesitate to change course. This is the “Trump Put”. Then there is the US Federal Reserve Bank.
The “Put”.
Since the initial Liberation Day announcement and the 90-day implementation delay markets have rallied. The rationale behind this is the concept of the “Trump Put” and the “Fed Put”. What is a Put? This is a term from the Options market, by buying a Put a trader is essentially purchasing an insurance policy that will pay out should shares fall. The “Fed Put” refers to the market belief that the Fed will intervene with accommodative monetary policy to support the stock market, during periods of significant decline. It’s analogous to a Put option, the Fed acts as a protector against downside risk. In the current set of circumstances, the market now believes that the US economy has received a shock which will manifest itself in a slowdown to growth and a rise in unemployment. Thus, the belief is the Fed must cut interest rates to reflect this new economic news. The fact is that they have plenty of room to do so. However, the Fed Chairman Jay Powell, historically, likes to wait for evidence and rarely acts pre-emptively.
US Recession is it imminent?
Source: Apollo Asset Management
This flow chart from Apollo Asset Management explains the present situation clearly. By late May there should be empty shelves at US supermarkets and retailers. The extent of this is uncertain as it depends just how much stockpiling took place before Liberation Day. There are also reports of boom time at some retailers as consumers rush to buy stock at pre-tariff levels. Car dealers in particular are seeing existing stock fly out at pre-tariff asking prices, but also new orders cancelled. So short term boom and then recession. A complex economic situation for the Fed to consider. If this Apollo flow chart works and it seems that ship berthing at the critical Port of Long Beach is down by over 50%, then the US could enter recession BEFORE the 90 day tariff extension expires. Thus, placing pressure on the Trump team to agree deals well before then. But this does not appear to include China.
China
Of all the countries facing the increase in tariffs China was the only one to retaliate and kept doing so each time Trump added further penalties on. They are now at a level of 145%. It would seem that there are no talks taking place and China has quietly weakened the yuan to help mitigate some of the impact on exporters. Seemingly, China doesn’t care and keeps displaying it’s technical capability with new chips to add to the impressive Deep Seek AI programme. An early trade deal with China seems unlikely for now.
Markets
Some markets such as Germany have retraced all of the initial fall, but they are a small percentage of the global index. Big Tech and the other giant US multinationals that at one time made up 70% of the index have not. The dollar has moved from enhancing returns for UK investors to being a headwind. The S&P 500 is down 6% so far this year in dollars, over 10% in sterling. This rally is predicated on one man agreeing to trade deals, it is by no means certain that he does. The next two months before the 90-dayextension expires are likely to be volatile. Trump says that he is a “dealmaker”, but so far none have been done e.g. Ukraine. China seems to be reluctant to talk, perhaps believing that Trump’s strategy is of greater harm to the US than to itself. The economic stats have yet to reflect the impact of the tariffs, they probably won’t until June. Nevertheless, markets will need to see progress on trade deals and soon. Furthermore, Fed action might be needed to avoid or mitigate the classic “double dip” recession. Recessions caused by the Fed are painful for markets e.g. 2022, those caused by external factors e.g. Covid, less so. For now, markets are in the hands of Trump and the Fed.
