Make no mistake—Donald Trump is coming to town with a gigantic set of tariffs. These would have serious, long-term impacts on the U.S. economy and global markets. Yet the former president has still managed to propose an average tariff rate that would exceed anything in recent history. It has raised the hackles of alarm and hopeful investors alike. As the August 1 deadline for negotiating with the European Union gets closer, uncertainty clouds the situation. Recent market reactions show a nuanced and contradictory picture of where investors stand.
As we noted in our previous alert, Trump issued a not-so-veiled threat. If a deal’s not made by the deadline, he intends to impose a 30% tariff on European Union imports. This radical step has already made waves and turned heads among economists and investors alike. In particular, they are bothered by what precedent it could set for adverse international trade relations. Eric Freedman, a noted market analyst, warned that 15% was still a big tariff. He acknowledged it provides some relief from what we were all fearing—25% tariffs. This feeling is indicative of a larger fear that higher tariffs could severely shake the stability of the entire market.
For context, Trump just announced a 35% tariff on all Canadian imports. This tariff action increases tensions with our largest trading partners even more, on top of retaliatory EU tariffs already in place. Add these developments to a growing trend of such aggressive trade policy and the potential for extremely disruptive market volatility becomes more real. This is making investors jittery as well, mainly over the potential tariff hike of more than 20%. Freedman noted that market expressions today are ignoring these elevated spreads.
Rising Tensions with Trading Partners
Those decisions, coupled with recent tariff announcements, have fueled dramatic escalation of tension with our nation’s largest trading partners. This includes Mexico, the European Union, and India. All of this has not only added to their uncertainty, but distorted markets through Trump’s actions. His announcement in April of his “Liberation Day” tariffs, for instance, caused a record one-day drop on U.S. stocks. The VIX index skyrocketed above 50 points, signaling the extreme level of anxiety that gripped investors.
Amidst all of this turmoil, there is evidence of markets showing resilience. So far this week, the S&P 500 has set four new all-time record highs. This dramatic increase represents real evidence of increasing investor confidence as trade talk negotiations play out. Analysts attribute the rally to a few major influences. They cite progress in ongoing trade negotiations and an increasing sense that the world can learn to live with the existing, higher level of tariffs.
In one area, Trump’s negotiations with Japan have yielded tremendous fruits. He replaced the long-standing threat of a 25% tariff on all imports with a proposed 15% tariff. This tariff hike is further evidence that Trump is committed to raising tariffs. It may mean a greater possibility for compromise exists, which could address many of the market’s worries.
The August 1 Deadline and Market Reactions
The tenatives August 1 deadline for negotiations with the European Union is quickly approaching. Stakeholders are closely watching for any indications of movement or further build-up. So far, Trump has announced that there is a “50-50 chance” of getting a trade deal put together in time. This announcement makes clear how fragile the negotiations actually are. Investors are a bit more than cautiously optimistic. They contend that a deal might provide more certainty and relieve concerns over punitive tariffs.
Markets are stable for now, Freedman stresses that there is no margin for error in these delicate negotiations. The possibility of non-linear effects that stoke new volatility — especially if tariffs are more vigorous than the market is anticipating. Judging by today’s market reaction, it appears that investors are a bit numb to tariff news by now.
Investment strategist Ed Yardeni stated that the tariff turmoil unleashed by Trump seems to be fading, and that may be boosting investor spirits. The notion that the world can withstand current tariff levels has gained traction among analysts like Mohit Kumar, who argue that while uncertainties persist, markets have shown resilience in the face of potential disruptions.