Following a tumultuous week on financial markets, with President Trump unwinding some tariff measures and ratcheting up others, uncertainty abounds, with little clarity on the future path of policy. However, as we discussed in our Weekly publication last Friday, the markets have found the pain threshold for the Trump administration and have potentially set a guardrail on future policy.
To recap, a simultaneous sell-off in riskier assets (US stocks) and supposedly safe-haven assets (US treasuries), alongside a depreciation in the dollar, brought markets to a precipice of a potential contagion event. In particular, the deterioration in the Treasuries market risked material consequences for other credit and money markets it underpins. The moves in the US bond market very much reflected the pattern of an emerging market economy in periods of stress, instead of the more predictable behaviour of a ‘flight to safety’ in Treasuries observed during prior stock market corrections. Most critically, the large twin deficits in the US fiscal and current accounts implied the ‘kindness of strangers’ on which the US system relies, was wearing thin.
The positive outcome of the week’s events is that the administration was eventually constrained by the markets. President Trump unwound most of the country-level tariffs back to a baseline of 10% for a period of 90 days to allow negotiations. Whatever the outcome of any trade talks, it may prove difficult for Trump to re-enact these tariffs.
