- Trump has imposed a number of tariffs on its trade partners, igniting trade wars.
- The US threatened to impose a 200% tariff on alcohol imports from the Eurozone.
- Tariff uncertainty will drive more cash away from equities and into safer assets like bonds and gold.
Interest futures pulled back as US Treasury yields rebounded from the previous session’s dip. On Thursday, panic rocked the markets as Trump threatened more tariffs on the Eurozone. As a result, investors dumped risky assets like equities, preferring the safety of bonds.
Tariff uncertainty has been the main catalyst for markets in recent weeks. Trump has imposed a number of tariffs on US trade partners, igniting trade wars. These wars threaten to curb global economic growth and lead to a spike in inflation.
At the moment, the US is at war with major partners like Canada, China and the Eurozone. The most recent conflict started after Trump imposed a 25% tariff on aluminium and steel imports. This move triggered responses from major exporters to the US, such as Canada and the Eurozone. The Eurozone has issued a warning about potential counter-tariffs on American whiskey. As a result, Trump responded with a threat to impose a 200% tariff on alcohol imports from the Eurozone.
Weaker demand in major economies like the US will mean poor global growth. Moreover, market participants are worried about a likely US recession. Consequently, there was turmoil on Thursday as investors fled risky assets like equities. However, interest futures rose as demand for safer bonds increased.
Furthermore, tariffs boost inflation by increasing the cost of goods. Higher inflation will force central banks like the Fed to keep interest rates elevated. This has overshadowed recent US economic data that has revealed soft inflation.
On Wednesday, the Consumer Price Index report revealed a 0.2% increase in February. This was smaller than the forecast of 0.3%. The annual figure also came in below forecasts at 2.8%.
US wholesale inflation (Source: Bureau of Labor Statistics)
Meanwhile, data on Thursday revealed no change in wholesale inflation. Experts had predicted a 0.3% increase. Although Fed rate cut expectations rose, there was little impact on market sentiment. Inflation expectations are slowly rising as Trump imposes more tariffs. Moreover, policymakers have maintained a cautious tone despite downbeat economic data.
More tariffs will increase economic uncertainty. Trump has promised a reciprocal tariff starting in April. This will affect more countries, worsening the outlook for the global economy. Moreover, it will drive more cash away from equities and into safer assets like bonds and gold.
