How will they impact financial markets?
On April 2nd reciprocal tariffs from the US will finally be announced. Ahead of what President Trump calls ‘Liberation Day’, stock markets have slumped, and investors have rushed into haven assets like gold. Initially reciprocal tariffs were viewed as equalizing tariffs: the US would impose a levy on imports from countries that impose levies or taxes on US goods. These would be individualized tariffs that President Trump deemed fair. However, in recent days there has been talk that the White House will impose an across-the-board tariff that would be one single rate applied to all US imports and could impact nearly every country in the world.
This option would be far more aggressive than individualized tariffs and could see higher levies imposed by the US than elsewhere. Although there was always a chance that President Trump could opt for this path, it is only in recent days that markets have priced in the chance of blanket tariffs, which is one reason why stock markets have sold off sharply in recent days.
Exactly how tariffs will be applied remains unclear, and we will look to get these crucial details on April 2nd. Either way, they are likely to have a major impact on the US and the global economy. The US’s average tariff rate has jumped from 2% before President Trump took office in January, to 8% today. This is before reciprocal tariffs. If a large blanket tariff is applied to all imports on Wednesday, then the average tariff rate for the US could rise well above 10%, which is bad news for the global economy.
The impact on growth and inflation
The impact from reciprocal tariffs is expected to be broad, and affect growth, inflation and unemployment. However, until we know the details of the tariffs and their expected duration, it is hard to know for sure. At this stage, estimates of the impact on growth and inflation are hypothetical.
Traditionally, protectionism is considered bad for the global economy, and there is no reason to think differently this time around. Some analysts are predicting a sharp rise in inflation to 3.5% this year from 2.8% currently. GDP could slow to around 1% for this year, in Q4 2024 the annual growth rate in the US was 2.4%. The Unemployment rate is also expected to rise.
The impact on inflation could be limited, in our view. Without a doubt tariffs are inflationary; however, they usually lead to a one-off price shock. Thus, the upward impact on inflation from tariffs could be short lived as it falls out of the index over the coming months. This could give financial markets a silver lining: if inflation slows later this year, then it could give the Federal Reserve scope to cut interest rates. Even so, the April reading of CPI will be closely watched to see how great the impact actually is.
Much more damaging to the US economy is the sharp slowdown in the rate of growth. To slow from a 2.4% GDP rate to a 1% rate is a big adjustment that will have a big impact on financial markets and corporate earnings growth. An unintended consequence of tariffs is the opportunity cost of a slowing economy. Tariffs come at a very high cost to the US economy, recession risks for the US are also being revised higher. Goldman Sachs analysts now sees the probability of a US recession triggered by the tariffs at 35% for this year, previously it was 20%.
The impact on growth is not limited to the US. Recession risks elsewhere are higher than the US. Germany has been in recession for more than a year, and there is still a 50% chance that its economy will fall into a recession this year, according to Bloomberg. In France the chance of a recession in one year is 57%, in the UK it is on par with the US at approximately 35%.
Europe vs. US outperformance, and why it might continue
If recession risks are higher in Europe, why have European stocks outperformed US stocks by the widest ever margin in Q1 2025? There are two answers to this question. The first is that the German economy is undergoing radical change. Berlin has unlocked its fiscal brake for the first time in decades, which will unleash a massive round of government spending on defense and infrastructure. The whole of Europe is set to boost their defense spending in the coming months and years, which has been a powerful driver for European stocks this year.
The second answer to this question is that while Europe and other countries can try and US imports, then US exporters could find themselves shunned by global trade partners. Alliances between Europe and Asia may become more important in the coming years than alliances between Europe and the US.
The Trump slump
Since the start of the year, UIS stocks have headed sharply lower. The S&P 500 is down nearly 5%, while the Nasdaq is in correction territory and is lower by more than 10% so far in 2025.
Although the S&P 500 managed to reverse earlier losses on Monday, the outlook for Q2 looks bleak for US blue chip indices. Also, the reversal in fortunes for US stocks on Monday may not continue. This week is packed full of event risk. Firstly, the tariff announcement on April 2nd. We will also get the start of the month data, including service sector ISM and payrolls data. The latest indicators on service sector growth are forecast to show that the outlook for this important sector of the US economy is subdued and manufacturing is likely to remain in the doldrums. This could trigger another round of losses for US stocks.
The US investment bank Goldman Sachs has reduced its price estimate for the S&P 500 from 6,200 to 5,700, which is a gain of less than 2% from Monday’s close. GS has also lowered its forecasts for earnings growth this year. We expect other analysts to follow suit. When earnings estimates are revised, lower this can lead to a downward spiral for stocks, and it could make it hard for the S&P 500 to rally from here, even though the US index managed to eke out a gain at the start of the week.
European and Asian stocks have also sold off in the past month, however, they continue to outperform US indices, and their losses in March were lower than losses for US stocks. We think that cooling sentiment to the US could lead to a structural shift in asset allocation to alternatives, for example to Asia and to Europe. We believe that Europe is an obvious choice due to its size and the fact it is very liquid, although other options exist for example in China and emerging markets. President Trump’s tariff plans mean that there is less confidence in the future of the US remaining at the centre of global finance, which is a problem for the US market. This can already be seen in the underperformance of US stocks vs. their global peers, and it is also prevalent in the FX market.
Chart 1: US 500, 1 -year
Source: xStation, XTB, Past performance is not a reliable indicator of future results.
The dollar slides
The US dollar is the weakest currency in the G10 FX space so far this year. The Canadian dollar is higher vs. the US dollar, even though its economy is already facing 25% tariffs on exports to the US. USD/JPY is down more than 4% YTD, while EUR/USD is higher by more than 4.5% and the pound is also higher vs. the USD by more than 3.3% this year.
The dollar is not acting like a haven, which is another sign that one of the consequences of President Trump’s tariff programme is a weaker dollar. There are plenty of people who argue that this was part of Trump’s plan all along: to devalue the USD to boost exports and reverse the US’s deficit problem. However, an unintended consequence of Trump’s heavy handedness when it comes to tariffs, is that part of the decline in the dollar could also be linked to a growing view that as the US becomes less central to global trade, the dollar could eventually lose its status as the world’s reserve currency. Trade barriers change trading relationships, if the US is making global trade more expensive, then it is natural that people will turn elsewhere to find different trading relationships that may not include the USD. This may not happen immediately, but President Trump is a big PR problem for the US dollar.
EUR/USD remains in target of $1.10, GBP/USD could still breach $1.30, and USD/JPY has slumped below 150, and further dollar declines are possible.
All that glitters..
Now that the US dollar has been discarded as a haven, investors have piled into gold instead. The gold price has surged to a fresh record this week above $3,120 per ounce, and it has risen by nearly 20% YTD. Although gold has been in an uptrend since 2022, President Trump’s unorthodox economic policies have helped to super charge its uptrend to previously unfathomable heights.
Factors that have been driving the gold price include lower levels of volatility compared to other asset classes like stocks, its characteristic as an inflation hedge, and its traditional status as a haven. Currently gold looks like the safest haven in the world, aside from maybe German defence companies.
There seems to be few barriers that are getting in the way of the gold price right now. The biggest threat to further gains could come from a U-turn from the President, or if reciprocal tariffs are watered down. We do not think that this is likely in the short term, but it is possible down the line, especially if the US economy falls sharply.
Chart 2: Gold, 1- year chart
Source: xStation, XTB, Past performance is not a reliable indicator of future results.
To conclude, tariffs will become a reality this week. At that point the impact on growth, stocks and future earnings can be calculated with more accuracy, and that is when the real market reaction will happen. Either markets will be too pessimistic about tariffs, or not pessimistic enough. One thing is for sure, volatility will be a key feature around the tariff announcement.
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