Earlier this week, we discussed the Trump administration's new trade and tariff policies and why they seem to be responsible for at least some (if not most) of the significant volatility that has gripped global stock markets since February.
Today, that volatility continues, with news that the United States will now impose a 25% import tariff on all new motor vehicles entering the country. This could be why the flagship American S&P 500 Index (SP: .INX) fell 1.12% this morning, and it's almost certainly why General Motors stock tanked 3.12%.
This volatility looks set to continue next week when 'liberation day' rolls around.
'Liberation day' for the US markets approaches
President Trump has called 2 April Liberation Day, the day when his administration is set to introduce the next phase of tariffs on imports entering the United States and those new vehicle taxes.
Upon taking office, Trump haphazardly imposed additional tariffs on Chinese imports, as well as those infamous 25% tariffs on all imports from Canada and Mexico. Not to mention those 25% tariffs on steel and aluminium imports that Australia has failed to get an exemption from.
But on 2 April, the new American trade policy will really be turned up a notch. Trump has promised to introduce 'reciprocal tariffs' on potentially dozens of American trading partners, including Australia.
In his mercantilist view of the world, Trump seems to regard any country that has a trade deficit (exports to the United States are higher than imports) as 'ripping off' America. These reciprocal tariffs seem to be Trump's solution to this 'problem'. He has indicated that each country will be assessed on its trading relationship with the US and tariffed if it is deemed to be too imbalanced.
Confusingly, the administration has stated that it will take all sorts of factors into account with these assessments, such as consumption taxes (our GST, for example). Unfortunately, we won't know exactly what these tariffs will look like until 2 April. We won't have much time to digest the announcements either, as the tariffs look set to come into effect immediately after.
How will these import taxes affect the ASX stock market?
Well, that's the billion-dollar question. Most experts regard tariffs as economically damaging rather than liberating. That's probably why we have seen so much volatility in the American stock markets since February. As many investors know, the markets usually move on expectations. Right now, they are undoubtedly already pricing in some impacts from a new round of additional tariffs.
However, if the announcements on 2 April are more dramatic than expected, we will probably see some big falls on Wall Street and, thus, here on the ASX. Conversely, if the new tariffs are weaker than what investors fear, we could well see a relief rally.
It's hard to know for sure until an announcement makes its way out of the White House.
The signs are not too rosy, though. As reported in the Australian Financial Review (AFR) this week, investment bank Macquarie has flagged that "the health of the US consumer – a key indicator for the outlook of the sharemarket – is getting battered by Trump's sweeping tariffs, government spending cuts that is pressuring household incomes and the ramp up in deportations".
Disregarding the market rallies we have seen over the past week or so, analysts at Macquarie went on to issue this warning:
Unless Trump blinks and pulls back from trade wars and spending cuts, which currently seems unlikely, there is risk of a material slowing in US real consumer spending… As this is the most consistent signal of a bear, we see growing risk that stocks fall 20 per cent from their Valentine's Day peak.
Let's see what 'liberation day' really brings to the markets next week.
