Client Update - 11th April 2025

President Trump has long extolled the virtues of tariffs. You have to say American voters should have known what they were getting, even though this new version of Trump is more dangerous than the first. We knew tariffs were coming, but until the first week of April, investors had largely been flying blind. The announcement in the White House Rose Garden of sweeping “reciprocal” tariffs temporarily brought clarity on what was in his mind, and the markets did not like it. So, he stepped back, for now.

However, he decided to calculate the tariffs, the rates and scope that could still be applied to friend and foe alike, which was indeed a lot more aggressive than even the most hawkish commentators had anticipated.

If Trump does eventually decide that negotiations have not gone well enough and should the full measure of tariffs return in July, the average tariff measures will not have stood so high in more than a century. A year ago, the US had a trade-weighted average tariff of just 2.2%. With Trump’s reciprocal tariffs this could now be between 22% and 24% – exceeding even the protectionist peaks of the 1930s and the infamous Smoot-Hawley tariffs. Although Smoot-Hawley lifted rates on dutiable goods to 59%, overall duties on total imports amounted to a lesser 20%.

It seems that the market reaction to his Liberation Day speech eventually led to Trump announcing a 90 day pause on the reciprocal tariffs this Wednesday, that is apart from China, whose tariff rate he increased again up to 145%. The market really liked that pause, but just for one day. It gave a huge and very welcome bounce to markets, however since then concerns have surfaced about a Chinese / US trade war and how it would impact on the global economy. The combined impact of the higher Chinese tariffs and the remaining 10% tariff on global importers to the US, along with the focussed industry tariffs, such as 25% on imported cars, currently stands to bring into the US coffers some $300bn a year – quite some tax rise. Markets remain worried that this is inflationary and whilst US consumers will worry that their next iPhone has just trebled in price, on this side of the Atlantic cheap goods redirected from China could actually be deflationary. What a contrast.

You could argue it was the capitulation of the US bond market on Wednesday that led to Trump stepping back from the brink, as borrowing costs soared and led to the market questioning whether America would be able to finance its existing debt (remember Liz Truss?). Bonds are supposed to be a safe haven in times of market panic. Investors sell equities and buy bonds, as they are backed by the Government (especially the US Government – which is the safest – right?), and subsequently the price of bonds go up, protecting your portfolio in times of volatility.

We saw in the UK in 2022, that when the bond market does not work like it is supposed to, contagion quickly turns into meltdown. The first sniff of this earlier this week could well have forced Trump’s hand. Equities were falling, complex trades placed by hedge funds were collapsing, so the good old liquid bonds were sold to cover losses and the market started to weaken. Throw in the question that with Trump in charge, “Is the US still a global safe haven?,” maybe not, and the bond sell off started to gain momentum. This pushed up the price of debt and resulted in immediate concerns that the US would not be able to finance its debt if the cost kept rising. Cue Trump announcing he had negotiated with 75 countries, they are all begging him for a deal, so reciprocal tariffs are paused for 90 days whilst we conduct these negotiations. Nothing to do with markets, right?

The other option was that this was all part of a pre-ordained plan. Trump wrote on his social media feed just hours before he announced the tariff pause “THIS IS A GREAT TIME TO BUY” - adding fuel to the speculation that this was a bit of a set up. Trading volumes in the Nasdaq spiked in the hour before his announcement, adding to the rumours that some people knew what was coming. It was reported by Bloomberg that last week the world’s wealthiest 500 people saw their combined wealth fall by $208bn within just 24 hours of Trump’s announcement on “Liberation Day”, yet the same group of people are said to have gained $304bn in the market bounce after Trump announced his pause this Wednesday. Crazy numbers.

There is definitely a whiff in the air that this was the plan all along, that Trump was always focussed on China. The announcement on Liberation Day of incredibly high global tariffs may have hidden the true aim. I would have thought that if Trump had announced 10% global tariffs and up to 145% tariffs on China alone, markets would have all said – “what, that’s not right, you have to change that”. Whereas now everyone is breathing a sigh of relief internally that their own country has been given some respite, and possibly not yet considering the huge impact on trade and prices that the China / US tariff battle will bring. As he likes to tell anyone who will listen, Trump is a masterful businessman – well, mmmm, let’s move on swiftly.

It is not all bad news, not remotely. Markets have started to recover and around the same time as Trump’s tariff announcements, there was also some more growth friendly news. In a surprise announcement, eight OPEC+ countries led by Saudi Arabia, announced an increase in output of 411,000 barrels per day. Oil prices fell sharply in response, and this will be welcome news for the White House (with President Trump always a keen believer in low US energy prices).

It remains to be seen how the US Federal Reserve (Fed) will respond to the inflationary pressures unleashed by rising trade barriers, given that core inflation remains uncomfortably high. Fed Chairman Jerome Powell was clear in his comments on the administration’s tariff proposals. The new tariffs, he said, were “significantly larger than expected” and are likely to “raise inflation in coming quarters.” He has also backed away from his earlier characterisation of tariff-induced inflation as transitory, acknowledging that “while tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent.”

Powell did also state that the economy remains “in a good place,” suggesting that a dramatic policy shift is unlikely for now. We continue to expect three rate cuts this year.

Ultimately, the responsibility for controlling Trump may fall to voters in the midterm elections in the latter part of 2026. Trump will be acutely aware that his tariffs are a long-term game, but the US mid-term elections will be brutal for the Republicans if Trump cannot bring some confidence back into the US market well in advance of then. For now, we remain very comfortable with our portfolio positioning away from US equities and in areas of the market that offer better value. It is certainly true that pockets of value are emerging in previously expensive US markets, but there is much more to consider before we make our move. It has been very pleasing to see this climb down from the tariff measures to allow for some reflection and we hope that portfolios will quickly get back on track, after what has been an excellent 18 months.

We will take a pause from our update next week and will write to you again on Friday 25th April. Do have a good weekend and an enjoyable bank holiday next week.