How important were the stock market sell-off and ructions in the U.S. Treasury market in Trump's decision to postpone tariffs in April?
That has become an important question for investors now that the first pause is over and Trump is ramping up duties again and sending letters to trading partners telling them what their tariffs will be - even if they don't kick in until August 1.
That's on top of the surprise copper announcement and pharmaceutical threats.
And, if the market reaction was even partly a factor in the April pause decision, investors now face a conundrum, and one that is somewhat reminiscent of the game theory classic prisoner's dilemma.
Lots of big fund managers think tariffs are bad for the U.S. economy, and, as such, are a reason to sell stocks. If tariffs also lead to higher inflation, which many believe they will, that is also a reason to sell Treasuries.
However, as of now, the collective market wisdom seems to think the bulk of tariffs will be postponed, negotiated away, or fudged, therefore giving investors little reason to sell.
That helps explain why the S&P 500 is down less than 1% from its record peak last week. World shares are steady too, and the Treasury market is quiet.
But here's the dilemma.
If there is no major market reaction to the newest tariff developments, maybe tariffs will not get postponed, negotiated, or fudged. Under such a scenario, the U.S. economy could take a hit, shares fall, and bond yields rise sharply, suggesting investors would have been better off selling in the first place.
At this point, it is worth noting that copper futures in the U.S. are at record highs after Tuesday's announcement, but metal futures in Europe and Asia are down.
But despite the threats, pharma and semiconductor stocks haven't moved much and, at the index level, the lack of concern at the moment seems remarkable.
According to a UBS model, the market is effectively pricing in zero tariff risks, and Bhanu Baweja, chief strategist at the investment bank, thinks this is a complacent position.
Baweja, in a client note, said the tariffs had both a "certain philosophical and ideological element", and a certain practical element as they were needed to fill the gap left by fiscal spending. Hence, the market should expect at least some of them to be implemented.
Whether, and when, markets react is another question however. And what would that mean for policy?
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