Donald Trump’s tariff knock back by the US Court of International Trade, is the main news that traders are digesting this morning. It throws into disarray several trade deals that have already been agreed, and those that are still in the negotiation phase.
The ruling accuses President Trump of overreach, and states that he did not have the power to use emergency legislation to impose tariffs. The tariffs themselves are not illegal, it is the way they were imposed. The ruling asserts that only Congress has the power to levy trade taxes. This throws a big spanner in the works for President Trump. The White House has said that it will appeal this decision, but for now, the future of Trump’s trade policy is airborne.
Trump is undone by … Trump supporters
Ironically enough, a conservative group that represented small business were the ones who brought the case against the tariffs, accusing the President of imposing trade levies on bogus claims of an ‘emergency’. Thus, a key plank of Trump’s economic policy could be brought down by people who may have voted for him in November.
The market reaction
The immediate market reaction has been a surge in stocks globally, including US futures. The S&P 500 is higher by more than 1.5% and the dollar is the one of the top performers in the G10 FX space on Thursday, USD/JPY is higher by 0.5% and USD/CHF is higher by 0.4%. The dollar index initially rallied strongly, but the move has been faded as we Europe gets to work; however, the index is still above 100.00.
What’s next for the dollar?
Sell the dollar was one of the biggest ‘tariff trades’, so now that tariffs are in jeopardy, an unwind of this position is to be expected. However, for now, the focus is on a recovery in USD/JPY, and losses in the euro and the pound vs. the dollar have been minimal so far. USD/JPY is back above the 50-day sma. The yen is likely to be the most impacted by the tariff chaos, partly because of its status as a safe haven, and also because of the pressure on the Japanese bond market.
Problems continue to build for the yen
The Japanese 30-year bond yield has risen by 60 bps in 3 months, which is eroding the yen’s position as the safest haven in FX. The news that a US court has ruled that tariffs are illegal has put upward pressure on global bond yields. US bonds are taking the brunt of the bond selling on Thursday, which is to be expected, since a reversal on tariffs could reduce the US tax take. For now, this is boosting the dollar, but we have already seen a reversal in the dollar index, and if yields continue to rise then we expect the dollar to come under pressure.
The problem for the bond market is that President Trump’s tariffs were linked to the extension of the tax breaks included in the US budget bill that is currently with the Senate. Without the tariff levies, can the US extend tax cuts without blowing the deficit? This is what investors will have to grapple with today.
European equities have opened broadly higher on Thursday, led by the tech sector and consumer discretionary. This is the anti-tariff trade coming to the fore. Globally, tech stocks are likely to receive a major boost on Thursday, as Nvidia results and the prospect of tariffs getting scrapped supercharge the tech sector. It is no surprise that ASML, German car makers and French luxury stocks are leading Europe higher, and we expect a similar pattern with tech stocks leading US markets higher later today.
Could the UK be at a disadvantage?
Interestingly, UK stock indices are not joining in the rally, and the rise in the oil price on Thursday is not impacting UK stocks. Is this a sign that stock markets in countries who did manage to score trade deals with the US in recent weeks, could be at a disadvantage if tariffs are reversed? This could be a short term theme to watch
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