- Risk appetite fell sharply on Monday as it became clear that high reciprocal tariffs were on again.
- Trump announced a 25% tariff on Japan and South Korea, effective starting in August.
- Market participants will watch the FOMC meeting minutes for clues on rate cuts.
Equities dropped on Monday after Trump announced to some of its trading partners, like Japan and South Korea, that tariffs would increase starting August 1. Meanwhile, Treasury yields and the dollar rose at the prospect of higher import costs that could drive up inflation.
Risk appetite fell sharply on Monday as it became clear that reciprocal tariffs were on again. In April, the US president had suspended them for 90 days, leaving a 10% baseline tariff in place.
During those 90 days, countries were required to submit proposals to trade negotiations that would prevent them from incurring high tariffs. Trump managed to sign deals with China, Vietnam and the UK. Additionally, reports have shown that there might be a deal soon with the European Union.
However, most other economies, like Japan and South Korea, could not agree with the US before the deadline. As a result, Trump announced a 25% tariff starting in August. The move renewed economic concerns.
So far, the tariffs that Trump has implemented since taking office have slowed the US economy. More of these levies would further hurt the economy, forcing the Fed to lower borrowing costs. Moreover, these tariffs could worsen trade tensions and spark trade wars that would hurt the global economy.
S&P 500 (Source: Bloomberg)
Meanwhile, equities soared last week after the US released upbeat employment figures. The economy added 147,000 jobs, beating forecasts of 111,000. At the same time, the unemployment rate came in at 4.1%. This was well below the forecast of 4.3%.
The report briefly eased pressure on the Fed to lower borrowing costs. At the same time, it reduced concerns of a rapid slowdown in the economy.
This week, all focus will be on developments in trade between the US and its partners. Any tariff responses could increase market turmoil. Furthermore, market participants will watch the FOMC meeting minutes for clues on rate cuts. Following the employment figures, markets are repricing expectations for this year’s moves.
Meanwhile, companies will start reporting second-quarter earnings next week, which will also impact the equities market. Downbeat earnings could weigh on risk appetite. On the other hand, resilient earnings would boost investor confidence.
