Tariff man sends out letters, but TACOs are still on the menu
President Trump has written his ‘Disgusted of Washington’ letters to a number of countries informing them of higher tariffs from 1 August, but the market doesn’t seem to care.
Tariff letters go out from Washington
A number of lucky countries have received letters from president Trump which spelled out his decision to increase tariffs on them from 1 August.
It was hardly a repeat of ‘Liberation Day’. Markets shrugged off the announcement, taking the view that a fresh round of negotiations would be likely. 9 July had been the day that the 90-day pause would expire, so yesterday actually marked a fresh extension to the deadline. In any case, Trump said later on Monday that he would be prepared to consider fresh negotiations with the letter recipients, essentially negating the threat of higher tariffs for the time being.
Rightly or wrongly, investors think they know what happens from here. Either negotiations result, and a ‘deal’ of some sort (usually in the vaguest terms) is announced, allowing Trump to claim a win, or a fresh extension to the deadline is announced. We are back to the now-infamous ‘Trump Always Chickens Out’ (TACO) trade; the US administration just doesn’t seem to have its heart in these negotiations. After the market chaos of April, who can blame them.
Notably, the EU didn’t receive a letter, lessening the impact of yesterday’s news. Overall it was a damp squib compared to Liberation Day, and suggests that tariffs have lost their power to shock.
Should investors care?
There is always a risk of further volatility arising from these tariffs and others. With US markets back at all time highs (apart from that perennial poor performer, the Russell 2000), the president might feel he has some scope for a little volatility. Short-term uncertainty is just part and parcel of investing.
But in the longer-term tariffs will be just another blip on the road. Markets will adjust, earnings may come down slightly but the overall picture continues to argue for a continuation of the current bull market.
Far more important in the near-term will be US earnings, which are about to enter their next round of corporate reporting. While the latest payrolls data suggesting an ongoing slowdown in job creation, a US recession still seems unlikely.
The S&P 500 and Nasdaq 100 both hit record highs last week. Based on history, we can expect further highs in the months to come.
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