US President Donald Trump’s tariffs and his continuing protectionist trade policies are shaking up global markets, stoking uncertainties, and prompting retaliation from countries worldwide.
While the risk perception is high amid the uncertain environment, a deep selling pressure hit global stock markets Monday, starting in Asia and expanding to other regions.
Japan’s Nikkei 225 fell 7.7% on Monday, as did South Korea’s Kospi Index (5.6%), China’s Shanghai Composite Index (7.3%), and the Hong Kong’s Hang Seng (13.2%).
European stocks followed suit as the share prices of about 97% of the companies in the Stoxx 600 declined.
Germany’s DAX 40 fell 7.1%, France’s CAC 40 6.3%, London’s FTSE 100 5.1%, and Italy’s FTSE MIB 30 7.4% on Monday after the opening.
1) WHAT CHANGED WHEN TRUMP TOOK OFFICE?
Since Trump took office this Jan. 20, the US global trade strategy shifted to a much more protectionist stance.
On the campaign trail, Trump had promised to reduce the US foreign trade deficit, but also to bring down prices, promises which may clash on his current course.
His tariff rhetoric sparked risk perception in global markets and weighed down on markets and asset pricing, swaying investors.
2) WHAT DO TARIFFS MEAN FOR THE MARKETS?
Trump’s tariffs led to price rises on products, and by boosting the price of imports to the US, the administration aimed to reduce demand and thereby reduce its foreign trade deficit, while forcing domestic production.
However, the price movements affect manufacturing and trade strategies of firms and countries, as many US firms producing abroad will be subject to tariff costs.
The uncertain environment and the tariffs have led to changing economic projections. The global economic outlook of central banks in particular have been affected by rising uncertainties.
3) WHAT WILL THE RECIPROCAL TARIFFS DO?
Trump’s reciprocal tariffs, announced last week, aim to significantly reduce the US trade deficit with its trading partners, which reached a record high of $130.7 billion in January.
As of latest data, the US trade deficit with the EU was $30.9 billion and with China $26.6 billion.
Trump’s reciprocal tariffs came in a range of 10% to 50% on over 180 countries.
The US levied 20% in reciprocal tariffs on EU countries, as well as 34% on China, 46% on Vietnam, 32% on Taiwan, 24% on Japan, 26% on India, 25% on South Korea, 36% on Thailand, 31% on Switzerland, 32% on Indonesia, 24% on Malaysia, 49% on Cambodia, 30% on South Africa, 30% on Bangladesh, and 17% on Israel.
Some countries, such as Türkiye, the UK, Brazil, Australia, the United Arab Emirates, New
Zealand, Egypt, and Saudi Arabia, were subjected to 10% reciprocal tariffs each.
4) WHY IS RISK PERCEPTION ON THE RISE?
The tariff announcements complicated forecasts for the global economy, and the expected retaliation from targeted countries strengthened trade war concerns.
World manufacturing hubs of China, Vietnam, and Taiwan offer cheap labor and logistics. These three countries were hit hard by the tariffs, as the tariff costs eclipse the cheap but highly advanced manufacturing infrastructure the three countries provide.
The tariffs on these countries keep the risk perception high in all stock markets, especially their own countries’ indices.
5) WHAT FOLLOWED AFTER TARIFFS AND SELLING PRESSURE?
Trump’s reciprocal tariffs were announced after the markets had already closed but the sales-heavy wave hit Asian stock markets, as it was technically the next day in that region.
Markets started the week with increasingly deepening sell-offs, which then spread to all major indices after the reciprocal tariffs.
Countries’ five-year credit risk premiums (CDS) climbed and the global bond demand rose with investors turning to safe haven assets, such as gold, while bond yields declined across the world.
Similar market movements were seen last August when selling pressure rose due to global recession concerns.