SUMMARY
The pausing of many new US tariffs sparked a market rally. However, uncertainty is set to persist, so investor caution is warranted.
KEY TAKEAWAYS:
US tariffs largely paused, but hiked for China
Negotiating phase with trade partners up next
Current tariffs weighing on growth, hiring and capex
Recession risks remain, albeit slightly less so
Amid uncertainty, consider diversifying and hedging
On April 9, US President Donald Trump announced a 90-day pause to reciprocal tariffs and would keep the base tariff rate of 10% during this period. However, President Trump also raised China tariffs up to 125% after Beijing said it would raise US tariffs to 84%.
The administration had said 75 countries had sought to negotiate deals with Washington, sending markets up overnight (S&P 500 +9.52%; Nasdaq +12.16%; DJIA +7.87%). Meanwhile, 10-year yields briefly touched 4.50% overnight, but settled back to 4.30% after a successful 10-year treasury auction.
US Treasury Secretary Scott Bessent was confident of reaching deals and warned countries against negotiating with China, according to Reuters. After three months of escalation, we may see several months of negotiations, during which tariffs stay at 10% for most and 125% for China. But these negotiations aren’t likely going to result in lower tariffs than 10%, and some reciprocal tariffs may return. Effective tariff rates ex-China now at 12-14%, which is still ten times 2024 levels and will be growth negative.
Recession odds have fallen a bit overnight but remain elevated. Reprieve in the coming months is certainly better than persistent escalations, but we remain doubtful that corporates would just instantly resume hiring and capex because of this pause. With companies pulling their guidance and altering behavior, the fundamental environment remains very uncertain.
Bottom line
Our call is for investors to remain cautious and not to increase portfolio risk. With companies pulling their guidance and altering behavior, the fundamental environment remains very uncertain. Earnings season will still be important, and corporates do not have reason to engage in investment or hiring after these announcements. This delays, but not dismantles, the risks to earnings and growth. Take this opportunity to diversify and hedge as portfolio risk management remains our priority.
