S&P500

Update on April 03

Snapshot of benchmark US stock indices on Wednesday: Dow, NASDAQ, S&P 500: all -2% S&P 500 at 5,535 in the range of 5,500 to 6,000

An hour before the market closed on Wednesday, Trump issued his highly publicized executive order for sharp tariff hikes on all countries.

China was hit the hardest with new tariffs ranging from 34% to 44%. The EU faced tariffs from 20% to 30%. The ambiguity in these figures comes from the fact that Trump imposed a blanket 10% tariff on all countries, even those like Israel, which had zero tariffs on US goods (Israel specifically eliminated tariffs on US goods before Trump's decision). Interestingly, was Trump briefed on this development?

Mexico and Canada are considered the relative winners, as they are not on the list of countries facing higher tariffs. Besides, the UK is subject to a 10% tariff.

The market rendered its verdict, and it turned out—unexpectedly?—for Trump and his advisers, that investors are indignant about the world trade war triggered by these tariffs and the likelihood of a recession.

Futures on Wall Street fell by about 3%, as did the Nikkei, while futures on European stocks dropped by about 1.7%. The yield on Treasury bonds hit multi-month lows, while the US dollar index plunged to a near six-month low in rather chaotic movements.

The US dollar sharply dropped against the Japanese yen.

Trump's announcement was made with high drama, as President Donald Trump read out various tariffs live on air using a large blue-and-yellow board. The main tariffs in the new list were:

• 34% additional tariffs on China
• 20% for the EU
• 32% for Taiwan
• 24% for Japan
• 46% for Vietnam

The inclusion of high tariffs for Asia came as a clear shock to technology stocks, as this promises to sharply increase costs in their supply chains. Apple's stock sank by 7% after the news about tariffs.

Almost all analysts, despite the White House's arguments, view the end of free trade as a shock to the economic growth of the US and the world, and will reassess recession risks.

This was evident from the federal funds futures, which rose to an 80 basis point price, signaling a potential rate cut by the Federal Reserve this year, even though these new tariffs will cause sharp inflation acceleration in the US. Analysts predict a jump from $6,000 to $10,000 on new cars alone.

Fed officials like to say that they will treat this tariff increase as a one-off price hike, but the pandemic shows what happens when companies realize they can raise prices and blame someone or something else.

It's also unclear how long these tariffs will be in force for, as the White House has stated that they are open to negotiations with different countries. Companies will find it difficult to plan long-term investments in such an uncertain environment.

Key events that may affect the markets on Thursday:

• US trade data;
• ISM services sector index;
• Weekly jobless claims

Energy market Brent oil is now trading at $72.60 a barrel, a drop of about $2 for the day. The reason is clear: Trump's new tariffs. However, the overall decline in global trade, likely to occur, along with lower production and demand volumes, will have a long-term negative impact on oil as well.

Conclusion

Unfortunately, the impact of Trump's actions on the global and US economies turned out to be much stronger than we had anticipated. It was clear that Trump would raise tariffs, but analysts had expected an increase of around 10%. As we can see, the tariffs were raised many times higher. We'd like to believe in the best, but most likely this will lead to a serious economic slowdown in the US and possibly a recession, or even a prolonged depression—analogies with the Great Depression are quite possible. Accordingly, the uptrend in the US stock market is in question. However, it still makes sense to hold long positions and keep track of the market's movements today. But if your account is highly leveraged, it might make sense to close some positions.