Stalling negotiations between China and the US on trade raises anxiety levels on economic and demand growth prospects once again. It is not even clear whether the two leaders have spoken to one another and the overnight comments from US Treasury Secretary, Scott Bennet added more fuel to the fire of uncertainty. He said in an interview with CNBC that it was ‘up to China to de-escalate’ but his advice is unlikely to be heeded by the leaders of the world’s second-biggest economy. The chances of a complete breakdown in trade relationships, with all the catastrophic repercussions on growth, have elevated although below we outline our view of why all hell will probably not break loose. Today’s US GDP, consumer confidence and JOLTS Job Openings data will offer a preview of the potential damage tariffs can cause. As animosity between the US and China is brewing, re-surfacing tension with the US’s northern neighbour cannot be ruled out either with the election triumph of Canada’s Liberal party led by the former Bank of England governor, Mark Carney – ironically with the potent help of the US President who forcefully campaigned for the right-wing Conservative candidate.

The tangible souring of investors’ mood was unconditionally felt in the oil market, too. The two major crude oil futures contracts lost around $1/bbl, partially pressured by refinery shutdowns in the Iberian Peninsula caused by a massive power blackout, which brought Spain and Portugal to a virtual standstill. Vladimir Putin’s three-day ceasefire declaration might have added to the bearish sentiment but one must not be blindsided – it is more of a PR move to please Donald Trump than a genuine attempt to stop the bloodshed. Risk is apparently off again and only the US and China are able to increase the appetite for it.

Markets Keep Tariffs in Check

Historians will debate for a long time to come whether the US tariff tsunami major trading allies and foes have been blessed with in the last three months is genuinely part of a successful grand plan to make America great, but not so much liked, again or it is the complete lack of understanding of how international trade functions. In any case, there seems to be a tendency regarding how punitive measures are announced, implemented, paused or withdrawn. The list of major developments February-to-date speak volumes.

February 1: Tariffs on Canada, Mexico and China are announced.
February 3: Tariffs on Canada and Mexico are on hold for 30 days.
March 4: Tariffs on Canada and Mexico come into effect.
March 6: Executive orders backtrack on tariffs on Canada and Mexico.
April 2: Tariffs of 10% to 50% on 185 countries, effective April 9, are announced.
April 9: a pause of 90 days on high tariffs is announced, and a baseline of 10% is implemented apart from China, which is hit with import taxes of 145%.
April 11: President Trump exempts phones and other electronics but in the same breath he announces that the move is only temporary.

When these seemingly capricious trade policies are set against the price movements of assorted asset classes, such as equities, bonds, the dollar, gold and oil, it becomes discernible that new tariff announcements are never received warmly and pauses and exemptions go a long way to calm investors nerves. Or, it can be argued, because of the negative reactions to planned tariffs, exemptions usually follow soon. Given the reprieves of the last month or two, it is now also obvious what always was evident: the main adversary is China and constructive trade deals are much more plausible with former friends than with the world’s second biggest economy as the battle for economic dominance intensifies.

Approaching the ongoing trade conflagration from a different angle, the last three months insinuate that the worst, at least for now, is over. The market reaction raised several red flags within the US Administration. Announced tariffs will probably not deteriorate and some equilibrium will be found. This, however, does not mean that re-establishing the pre-Trump status quo is inevitable, far from it. Reciprocal punitive measures will be imposed, and their extent is the critical variable. According to a Yale Budget Lab study and cited by the Financial Times the effective US tariff rate will be between 18% and 25%. To put this estimate in historical perspective, it would be the highest for 90 years. The inevitable consequences would be lower growth globally (even recession), elevated consumer prices (inflation), or the combination of the two, stagflation. If one believes that tariffs will, in fact, be implemented, US trade deficit might narrow but it will not disappear, and the revival of the domestic manufacturing sector will remain AWOL. As hard economic data for April is released next month, the most salient of which are probably consumer spending and CPI, buoyant investor sentiment might deteriorate temporarily again but the current snapshot (ie. sub-50% excise duties) suggests that recent lows in equities, bonds and the dollar will not be violated.

Oil has closely tracked the movement in equities, bonds and the dollar as fluctuating economic headwinds and optimism dashed or raised the hopes for healthy demand growth. The recovery in oil prices, experienced since April 9 has also been aided by the general backwardation of the five major crude oil contracts. It is a rare phenomenon to see the front-end of the curve maintain its premium to longer-dated contracts when flat price value erodes and as such it serves as an incentive to hedge future purchases. Geopolitics, namely the elusive prospects of a Ukraine-Russia peace deal and the perpetual tension in the Middle East threatening to decimate Iranian crude oil exports also played a role in the bounce. These bullish supply-side perspectives, however, might be countered by the weakening OPEC+ cohesion as echoed in a faster-than-anticipated output increase both in May and June with Kazakhstan openly prioritizing its domestic production over compliance. The ostensibly looser oil balance ought to limit the upside in case of further price strength but falling below the April troughs appears equally unlikely. The major, and admittedly subjective, conclusion after the first 100 days of the second Trump presidency is that markets have ultimately reined in extreme US trade policies. Still, economic and oil demand growth projections have been amended, accounting for some disruptions in the flow of goods between nations. Whilst the economic outlook has worsened in April together with the oil balance, lessons have been learnt. Volatility is likely to persist on a day-to-day basis, but the bigger picture implies that the nadir has been achieved.
 

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