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Responding to market turmoil and growing criticism from economic experts, business leaders, party members and foreign government leaders, President Trump announced a 90-day pause to the tariff war on most nations, reversing the White House Rose Garden announcement from only one week ago.
The criticisms of the policy were numerous and included the irrational calculation that supported the tariff levels (the infamous flawed formula), the speed of proposed implementation, the economic harm to corporations and American citizens, the irreparable damage to relationships with trading partners, the fear of inflation and a building consensus that a global recession was the most likely outcome from this self-inflicted catastrophe. The one exception to the pause was China, where the president raised duties to 125%, signaling that the primary focus of the trade war was actually China.
Although the president tried to maintain a brave face in the eye of this adversity, with his close lieutenants backing the strategy, it appears that the breaking point was reached when strains started to show in what would ordinarily be the bedrock of capital markets, namely US Treasuries. As the free-fall in Treasury yields had been a marquee of the positive spin communicated by US Treasury Secretary Scott Bessent, a 50 basis-point move higher in 10 year-yields over three trading days proved too hot to handle and likely catapulted the administration into crisis management mode.
This action was one of the swiftest policy reversals investors have ever witnessed and so unsurprisingly, markets also reversed in mid-day trading in a violent fashion: equities traded materially higher, with the Nasdaq composite retracing almost all its one-week trading losses and the S&P 500 closing only 4% lower than one week ago. The S&P/TSX also staged a strong rally of over 5% but lagged the recovery of US stocks.
The messaging from the White House is anchored on the 75 countries that have come forward to negotiate more favourable trade terms for America and the time that is needed to execute on these “great” deals. The administration has even gone as far as suggesting that this was the plan all along — to push other nations to the brink and force deals to be made. The only problem with that theory is that this had been the case since the weekend based on public comments from President Trump and his trade advisors and yet it took until now to announce the pause. The president’s admission that “people were getting a little queasy” reinforces the pressure that was felt to offer some relief for capital markets.
After this roller coaster ride, the question remains, what happens now? While extreme levels of volatility may have subsided for now, there are still several points of uncertainty that would prevent us from making any bold market calls from here. Firstly, the overhang of the next 90 days — undoubtably the team will have many favourable deals to announce over this period to reinforce the validity of the strategy, but the flipside is the insecurity that businesses and consumers will continue to feel about making spending decisions. We expect a continuation of nationalism taking hold globally with consumption and travel moving away from the United States. Thus, we continue to expect some level of slowdown, even if the global recession scenario has subsided with recent tariff news.
In this context, while the economic shock may be delayed or potentially cured, the global trading order continues to be upended by the policy direction of the US government. There is still uncertainty around the precise impact on inflation, global growth and earnings. We continue to believe that diversification by asset class and geography, a long-term outlook and disciplined decision-making are the soundest strategic pillars given the backdrop of uncertainty.
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