A 90-day truce - except China

President Trump has announced a 90-day truce with most of the international community, reducing tariffs to the baseline rate of 10% for the European Union (EU), Asia (excluding China) and South Africa, among other countries. This is a positive development. Most other major economies, including Latin America, Canada, the UK, and Australia, were already subject to baseline rate tariffs or lower.

For China on the other hand, the US has now increased tariffs to 145% (as of 10 April). A reversal of these increased tariffs looks unlikely, as there is no clear alternative path. And once tariffs reach these levels, they essentially become meaningless as trade between the two countries will eventually cease. 

Impact of uncertainty will be longer-lasting

Even if Trump negotiates deals to mitigate the effects of tariffs relatively soon, we should consider a scenario where he continues to disregard historical norms in policy decision making. The impact of this new approach is to increase uncertainty substantially.

Market participants, consumers and businesses generally react negatively to uncertainty by reducing risk: cutting back on spending, hiring, investment and risky investments. If this scenario does indeed play out, we would expect downward growth revisions giving way to downward earnings revisions.  

Structural regime shift

In the recent risk-off market, we have seen the US dollar, equities and fixed income all weaken at the same time, which is unusual for the US market. Despite the current relief rally, we could see a longer-term repricing of risk premiums around US assets, including a possible diversification away from US Treasuries. If this is the beginnings of a structural regime shift, it would create pockets of opportunity, along with market volatility.