Markets would be mad to play a game of chicken with Trump now

Telegraph

a day ago

'This market just wants to go up.' I have heard this said in the past month on trading floors on both sides of the Atlantic.
Market speculators tend to express this kind of sentiment when share price performance is strong but risks to the global economy seem to point to the downside.
As major global stock markets break all-time highs, investors are fretting about what may happen on Aug 1 when Donald Trump reinstates the so-called reciprocal tariffs, which have been paused since April 9.
Recall that the US president was forced to hit pause to arrest an unfolding financial panic. He sparked fears that the sky-high tariffs he had unveiled a week earlier would trigger an inflationary slump in the US and tip parts of the world economy into recession.
In the week following the tariff announcement, the Dow Jones Global Index fell 11pc. Since then, however, stocks have enjoyed a precipitous rise. Now, unlike in April, when sudden tariffs jarred risk appetites, market participants are sanguine about their return.
Some market makers talk of a Taco trade – an acronym for 'Trump always chickens out'. They bet that the president will not have the stomach to risk another painful market correction and will kick the can down the road again.
After all, the initial 90-day pause should have ended on July 8 but was extended to Aug 1. Trump has built a reputation as a strongman leader who is willing to take big risks. Inviting him to play a game of chicken seems too much like an opportunity that he will welcome in order to prove his mettle once again.
The reason for the market rally, more likely, is much more banal and relates to more fundamental developments.
First, now that the initial surprise has worn off and thanks to the pauses, businesses and consumers have had time to adjust supply chains, shift inventories, and spread out the costs.
Second, because the US has struck deals with a few major economies, the threat of a full-blown tit-for-tat global trade war has been contained. The UK and Japan agreements are a positive signal for the difficult ongoing negotiations with the EU, Canada, and Mexico, which together account for almost half of all US imports.
Third, the all-important US–China talk s are running on a separate schedule. After the dramatic escalation in March and April, which amounted to a de facto trade embargo after the baseline US tariff on Chinese goods peaked at 145pc, both sides agreed a 90-day pause in Geneva on May 12.
US tariffs are temporarily set at 55pc, while China applies tariffs of 10pc on US imports. Scott Bessent, the US treasury secretary has signalled that the deadline on the US–China talks will likely be extended beyond the Aug 12 deadline.
The Yale Budget Lab calculated that the average effective US tariff was 22.5pc on April 7 – the highest since 1909.
Once all current and likely deals are accounted for, the eventual average-weighted US tariff will still be the highest it has been in more than a century and little different from the one that Trump announced on 'liberation day'.
In its latest update on July 23, which incorporates Trump's deal with Japan (this reduced the baseline tariff from a threatened 25pc to a still-high 15pc), the average weighted tariff was 20.2pc.
But US imports are only worth about 3pc of global GDP, and Polymarket odds of a US recession in 2025 have dropped from 65pc in April to 20pc at present.
With more time to adjust and with less uncertainty, the dislocations associated with US protectionism have become more manageable.
Greater clarity over US trade policy has allowed a host of broader and less prominent positive themes to play a greater role in shaping expectations in financial markets.
They include the fading Russian energy shock in Europe, the global demand boost coming from the lagged impact of interest rate cuts by major central banks, the massive defence-and-infrastructure-oriented fiscal expansions in Europe and China, and further tax cuts in the US.
In a world where one or two big risks dominate headlines, individual investors can often struggle to see a way through the fog. But prices in markets, which reflect collective fundamentals and the implicit wisdom of the crowd, can tell a different story.
Global equities consistently provide a reliable leading indicator for global trade and production. In uncertain times, the market is often the best economist.
For instance, in late 2020, as major economies locked down for the upcoming Covid-19 winter wave and economists – including myself – warned that it could take the global economy years to recover from the unfolding mega-recession, global equities hitting all-time highs proved to be the signal for the V-shaped recovery that subsequently took place in 2021.
Then, as now, the market's collective wisdom offers valuable clues for those willing to pay attention.