Expectations are mounting for reductions in customs duties on high-profile U.S. exports, especially products from Red States such as agricultural goods and automobiles. This comes amid concerns that implementing and tracking a customized tariff schedule for each country could cripple the U.S. trade system. As the world watches, markets seem to perceive that former President Donald Trump is playing hardball rather than engaging in kamikaze economics. However, if this perception shifts, a sharp repricing of risk across various assets could ensue.
The year has barely begun, yet the implications of Trump's second term are already unfolding for markets, analysts, and global policymakers. Market volatility is increasingly driven by Trump's policy shifts rather than macroeconomic fundamentals. Investors are betting that Trump will manage trade tensions cautiously, given his focus on the S&P 500 as a primary economic scorecard. Consequently, many countries might preemptively adjust their tariff structures to maintain favorable relations with Washington.
The DXY index has climbed, buoyed by stronger wage growth and rising inflation expectations, both exacerbated by concerns over fresh tariffs. Swaps markets are now pricing in only one Federal Reserve rate cut for the year due to these tariff worries. In the currency markets, GBP/USD is struggling near 1.2400 in the early European session on Monday, while EUR/USD remains in the red above 1.0300, pressured by a stronger U.S. Dollar.
Gold continues to attract safe-haven flows amid persistent worries about Trump's trade tariffs, reaching a record high just shy of $2,900. Market participants have labeled Trump 2.0 as the "Deal Maker in Chief," with U.S. stock markets operating under the assumption that his tariff threats are ultimately negotiation tactics. Policymakers are actively working to neutralize Trump's protectionist tendencies before they escalate into full-blown trade wars.
Analysts and investors alike are grappling with uncertainty as they attempt to anticipate Trump's next moves. Despite lacking a crystal ball to predict future developments, market observers are keenly waiting for New York to set the tone while closely monitoring both EUR/USD and the S&P 500.