- President Trump is allocating tariffs to tariffs– He increased 30% to Mexico and Europe over the weekend – the market is still trading near its previous climax, assuming Trump will retreat. They also bet that the Fed will lower interest rates if tariffs damage the U.S. economy. But if the Fed prioritizes controlling inflation rather than saving the stock market, that may not happen.
In Asia this morning, U.S. bitcoins were near their all-time highs earlier today and reached $122K earlier today. There was a lot of sales this morning, but nothing to worry about.
However, according to some on Wall Street, none of this should have happened. That’s because investors seem to ignore President Trump’s tariff threat (he 30% threatened Mexico and the EU over the weekend) assuming they will eventually be negotiated or further ahead.
In other words, the market is cooking chicken with the president. (As they said German Bank.
DB’s Henry Allen told clients: “Obviously, the prices in these markets are not priced in these higher tariffs, and we may only know the results in the last few hours, thus providing a potential for sharp market responses and volatility increases.”
His colleague Jim Reid means something similar: “To be fair, a month ago, Trump threatened the EU with 50% tariffs, so you might say it’s an improvement! The market would usually think that it’s mainly a negotiation strategy, and we’re unlikely to see a price like this,” he told clients. “But at some stage, there might be a bluff that calls someone. Trump is under less pressure to lower the risk market in their heights and bond markets around the U.S. market, which is currently relatively stable. If we could impose huge tariffs on August 1, we might get a bigger market reaction.”
Goldman Sachs is singing in the same hymn. “Participants and our economists – mainly don’t want these tariffs to take effect. After seeing this pattern several times this year, the market may determine that floating interest rates are too high to maintain, so most people abstain from stricter financial conditions and policy retrospective self-settlement cycles,” Kamakshya Trivedi and his team told clients.
Similarly, UBS’s Paul Donovan: “Financial markets seem content with U.S. President Trump’s default to retreat to his latest trade tax threat.”
The market also seems to assume that if there is any problem with the taco trade, the U.S. Federal Reserve will rescue them.
JPMorgan’s Bruce Kasman and others predict that as the supply shock of tariffs hits the economy, a “stagnation tilt” will take place in the second half of the year. “The disconnect between this forecast and the market pricing of large gains in the company’s revenue and the high pressure of U.S. inflation is staggering,” they told clients over the weekend.
If the tariffs are inflationary, the Fed will not be able to deliver the cuts to the market at the current assumption that it is a priced interest rate. “Our forecasts should also be seen as a hug of the market’s solid growth Goldilock community scenario and reduce the challenges of U.S. inflation in a loose financing for the coming year,” they said.
Here is a snapshot of the action before the opening bell of New York:
- S&P 500 Futures This morning it fell 0.3% and went public. The index itself closed 0.33% on Friday, but is still close to its all-time high.
- Bitcoin Now over $122K, the highest in history.
- Kospi in Korea This morning it rose by 0.83%.
- Stoxx Europe 600 It fell 0.25% in early trading.
- FTSE 100 in the UK Early trading grew by 0.4%.
- Hong Kong Hang Increased by 0.26%.
- Nikkei 225 in Japan 0.28%.
- China CSI 300 Index It is flat and remains above 4,000, its highest level in history.
