In May 2019, the blockbuster ‘Rocketman’ celebrated its premiere at the Cannes Film Festival. The biopic pays tribute to Elton John and one of his greatest hits from the 1970s, ‘The Rocket Man’. The song was inspired by Ray Bradbury’s short story ‘The Rocket Man’ from ‘The Illustrated Man’. It is about a professional astronaut whose work keeps him away from his family for months at a time. Furthermore, the song captured the spirit of the early 1970s, when David Bowie had recorded the song ‘Space Oddity’ in 1969.
A lot has changed on Earth since May 2019. In the meantime, several wars and conflicts have broken out and a pandemic has dominated our everyday lives for several years. Between then and now, there have been four years of Joe Biden‘s presidency in the White House – and yet it seems as if nothing has changed since 2019. Because in May 2019, Donald Trump was still sitting in the White House and, just like this week, he announced extensive punitive tariffs.
If Elton John were to sing about the current zeitgeist instead of that of the 70s, the song would probably be titled ‘The Tariff Man’ and have the following lyrics:
And all these deals, they take too long
Can’ t trust the EU, man, they do us wrong
Mexico, they better pay
Or I’ ll tax them more today
[Chorus]
And I’ m the Tariff Man
Slappin’ taxes where I can, all night (all night)
Trade wars ain’ t as bad as they say
I’ ll just tweet it all away
I’ m the Tariff Man
Making China bend to my great might
They’ ll cave any day
Or I’ ll tax their savings away
What has happened in the last few days?
But back to the stock markets: on Sunday, Donald Trump made good on his threat from the US election campaign and the US government announced new tariffs on goods from Canada, Mexico and China. After the uncertainty caused by this sent stock markets tumbling, Trump announced a 30-day suspension of the 25% tariffs on imports from Canada and Mexico on Monday. This came after talks with Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau.
Both countries agreed to tighten their border controls to curb illegal immigration and drug trafficking, particularly fentanyl, into the US. This pause will give the three countries time to negotiate a broader economic agreement. Besides the EU, the United States’ most important trading partners are its immediate neighbours, Mexico and Canada. However, Trump has long been concerned about the trade deficit with these countries.
With China, on the other hand, the US remains on a confrontational course. While Mexico and Canada have been spared from tariffs for the time being, the US government has imposed a new 10% round of tariffs on Chinese imports. The Chinese government, for its part, has already announced retaliatory measures.
China’s response to the US tariffs:
- introduction of new 15% tariffs on US coal and liquefied natural gas (LNG)
- 10% tariffs on US crude oil, large vehicles and agricultural machinery
- initiation of an antitrust investigation against Google
- export restrictions on critical minerals important for semiconductor and battery production
What do we expect for the financial markets?
We were not surprised by the events of the past few days and the volatility that has arisen in the markets, and we have already pointed this out in this and other places in advance 👉
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Donald Trump is implementing what he announced during the election campaign and in his inauguration speech. The financial markets, on the other hand, reacted nervously. The US leading index S&P-500 lost almost 2% in intraday trading on Monday, but was able to recover some of these losses after the temporary suspension of tariffs on Mexican and Canadian imports was announced. The index closed the day down 0.8%. European equities followed a similar pattern, ending Monday’s trading session down 0.9% (interim losses of 1.5%).
US government bond yields were also subject to greater fluctuations at the start of the week, as was the price of gold. The US dollar appreciated noticeably against the euro during the day, but then gave up these gains. This reflected market participants’ expectation that tariffs could lead to a further widening of the interest rate gap between the US and the euro area.
Markets could wait and see for the time being
However, we were surprised by the fact that for the third time (Colombia before, now Canada and Mexico), the countries threatened with tariffs were able to reach a quick (provisional) agreement with the USA. This suggests that governments have already prepared for such measures.
The implication of this for the markets could be that when further tariffs are announced, market participants may initially adopt a wait-and-see attitude. This would reduce the selling pressure in the event of new tariffs, for example on the EU, and dampen volatility. From an investor’s point of view, it will be interesting to see whether an EU verse of Tariff Man will be added soon.