The art of the U-turn

Donald Trump has taken the power of the US Presidency to new levels, using Executive Orders, to implement far reaching change. The “Menu of Tariffs” presented to the world’s press in the White House Rose Garden on “Liberation Day” (2 April 2025) was far greater than expected, far heavier than his campaign trail promises and caught investment markets by surprise. For months US investors have been in denial that Trump would hit countries with such high import tariffs. Wall Street was spectacularly wrong footed by the scale of President Trump orders.

The rate of tariff varied from country to country depending upon the trade surplus and other import duties being applied to US goods in those countries. Countries in Asia were hit with the hardest tariff rates.

	Vietnam	46%
	Thailand	36%
	China	34%
	Japan	24%
	EU	20%
	UK	10%

As expected, the stock markets of Asia were hit the hardest on the news. Vietnamese stock fell 7% on the day as it has been a big winner of US supply chains shifting out of China.

Trump’s central grievance is with trade deficits, but this leaves developing Asian countries with little room to negotiate as the people of Vietnam, for example, are too poor to buy lots of expensive American goods to balance their deficit.

Asian markets are not alone, given Trump’s notorious unpredictability, the uncertainty of the impact of the tariffs on global trade and consumer costs lead to heavy losses in equity markets around the World. Trump wiped US$ trillions off World stock markets on what he called “Liberation Day”.

The S+P 500 is heavily weighted towards the big US tech giants who collectively have been adversely hit by these tariffs. US tech has been priced to perfection and any minor cause for concern would have implications for stock prices. The combined impact of higher interest rates, lower cost semi conductor chips to advance AI in China, and then these trade tariffs, sent the S+P 500 into corrective territory. From the high of 5776 on 26 March, the S+P 500 lost -13.75% by 8 April 2025. Over the same period the Euro Stoxx 50 lost -12.5%, the FTSE 100 -10.5%, the Nikkei 225 -12.8% and the Hang Seng Index -14.5%.

Governments around the World reflected on the new reality of Trump’s trade tariffs and many threatened retaliations including Canada and the EU, but did not act. Only China retaliated with an initial response of 34% tariff rate on US imports. This has since escalated in scale, so that China is hit with a 145% tariff rate on Chinese goods imported into USA and a reciprocal 125% tariff for all US goods entering China.

The trade deficit between USA and China was US$263billion in 2024. China only buys around 2% of its GDP from the US and could source different suppliers, so the Chinese consumer will be little impacted by Trump tariffs. The reverse is true for US consumer where the additional tax paid by US companies on importing US$426billion of Chinese goods will be passed on to the US consumer and result in inflation.

US inflation stood at 2.4% in March, down from 2.8% in February and 3% in January. The Federal Reserve are seeking a steady decline in inflation through its interest rate policy. US interest rates currently stand at 4.25%. This policy will be challenged by the rising inflation expected on the back of Trump’s tariffs. Traders have predicted as many as five rate cuts over the next twelve months, offering some stimulation for the economy. However, officials at the Federal Reserve have now suggested that the expected rate cuts may not be an option for them.

The reaction of the stock market was immediate with global stock shedding 10% -14% in the week after 2 April. This stock market plunge indicates the seriousness of a severe economic slowdown and the chances of a global recession. The “Liberation Day” tariff amounted to a US$600billion import tax hike on the cost of good entering America that would inevitably dampen demand and consumer confidence.

The mighty US Treasury market was equally coming under pressure due to a growing lack of confidence over the security of US finances because of the ensuing tariff wars. Long-dated US Treasury yields have risen over the past month with 30-year treasury yields up 0.24% and 20-year treasury yields up 0.274%. The US is running a gross Federal Debt to GDP of 122% and at the end of January 2025 the US national debt stood at US$36.2trillion.

Any lack of international confidence in the US as a credit worthy nation will adversely affect the yield expected from the international bond market to hold US debt. This is exactly what happened over the past few days as international investors headed by Japan (who own US$1.1 trillion of US debt) started dumping US treasuries. With yield demands rising and the costs to service a US$36.2 trillion deficit, it prompted the US Treasury Secretary Scott Bessent to personally warn Trump that he was on the brink of igniting a full-blown financial crisis made in the White House.

US Treasury yields were on track to rise by 0.5% last week, making the sharpest sell-off in the US Bond Market since September 2019. The rout in treasuries increased as investors moved out of US assets, signaling an erosion in confidence in the US. Trump was forced to back down on his tariffs as a run on the US Government would not “Make America Great Again,” in fact it would be catastrophic.

In a dramatic change of policy, just hours after tariffs on 60 of the US trading partners had kicked in, Trump announced a reduction to a 10% tariff rate for a 90-day period. Trump stated that he actioned a 90 day pause for the countries that did not retaliate. China (the only country that did) was hit with 125% tariffs. Trump put the major climb-down on people who were “getting yippy.”

The 90-day suspension on the implementation of the “Liberation Day” tariff rates failed to rescue bond markets with the US 10-year treasury bond yield rising to 4.49% as the sell-off continued.

For Trump’s tariff policy to have worked, the American Government must avoid a loss of confidence from the bond market so that US borrowing costs remain stable. Any lack of confidence, as we witnessed last week, will result in higher yields and higher borrowing costs. This lack of confidence in the USA saw the dollar fall, so that a GB£1 now buys US$1.30.

In the hours after the U turn the S+P 500 jumped 9.5%, only to fall back by -3.5% the next day as the implications for inflation and a potential recession kicked in.

President Trump is said to be annoyed that Chinese President Xi Jinping has not called him to start negotiations over settling the tariff wars. Why should he? “The Art of the Deal” is to let Trump make the first move as he has with the 60 other countries impacted by his tariffs.

While Trump blamed others for “getting yippy,” he is the architect to the market’s reactions to his policies, in the same way that the bond market reacted to Liz Truss’s mini budget of September 2022. In fact, Rachel Reeves lives in fear of a similar risk.

When Government yields are forced upwards to attract buyers, the capital value of the gilt will proportionately fall. This may result in a margin call for derivative or liability driven investments. To match margin losses, cash and gilts will be sold off, which pushes up yields. With Truss, the Bank of England stepped in to guarantee £60billion of UK gilt prices, with Trump it did not get that far.

Interestingly, in one recent survey of the public in America, people are not aware of the implications of the tariffs. The majority surveyed thought that the Chinese Government paid the tariffs, not the US companies importing Chinese goods. Elon Musk made the point very forcefully when he described Donald Trump’s Senior Trade Counsel Peter Navarro as “dumber than a sack of bricks”. Musk has always been an anti-tariff and voices his opinion as a major business owner.

It is understandable that by making imports more expensive, businesses will source homemade components and aid bringing manufacturing products back to the USA. The US consumer has got used to lower cost goods made through lower labour costs in Mexico and Vietnam (for instance). The repatriation of the manufacturing of these products will however cost the consumer. Many US jobs were lost because other countries produced a better product at a better price. This is the essence of free market economics.

The fact remains that for decades, other countries have been buying US treasuries thereby driving up the value of the US$. Manufacturing has been relocated to lower labour cost economies, driving down the cost of goods and creating low levels of global inflation. This has kept the US dependent on foreign investments to plug its trade deficit with the rest of the world. President Trump now seeks to rebalance this position.

There is clearly a need for the USA and Europe to reindustrialise and move away from a heavy dependency on China. A policy of this nature needs to be advanced so that companies can develop new supply chains. Tariffs alone are not a solution.

The next 90 days will be interesting with Trump looking for settlement terms to justify his climb down. The UK and EU could take advantage of this. However, the real issue is how the US/China trade war will conclude. We are dealing with prickly egos in a world of uncertainty. In the meantime, investors will be nervous.

The movement of money out of the US has benefited the European bond and stock markets. The expectation of lower tariffs, along with additional defence and infrastructure spending has benefited Europe and the UK and are seen as more stable markets.

One thing that is in the US’s favour is the strong labour market. The US put 228,000 new jobs in March, well above the expectation of 135,000. This follows on from 117,000 in February and 111,000 in January. It could be the robust job market that helps avoid recession.

The UK is unlikely to be that seriously impacted by tariffs. Tariffs could bring down inflation in the UK as stronger GB£ against the US$ will help reduce import costs. Goods made in China and originally destined for the US may be diverted to other markets, including the UK. This will put downward pressure on prices. This may result in interest rate cuts in the UK. Money markets are now pricing in three rate cuts by the Bank of England before the end of 2025.

There is also the growing opportunity for the UK and US to agree a free trade agreement in order that Donald Trump can claim an early success for his tariffs policy. This could be a welcome boost to the UK economy.

To keep you up to date with changes in the Crossing Point Guardian and Fusion trend following portfolio, the managers have sold out of Tech Funds, Property Funds, US treasuries and UK gilts, have held US positions but increased European holdings, whilst reducing Asia and Japan. The portfolios are also holding gold.

The unpredictable nature of this poorly thought through tariff policy is making the World feel “yippy”.

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