Quartet Macro Note – US Tariffs

This summary outlines the unexpectedly harsh scope of new US tariffs dubbed “Liberation Day” tariffs, spearheaded by President Trump under the banner of “reciprocal tariffs.”

Here is a breakdown of the key takeaways:

Tariff Details

• The US has imposed a flat 10% tariff to all US trading partners’ ex. Mexico and Canada, with higher rates (up to 50%) for select countries. President Trump believes this will boost the US economy and create jobs.
• When factoring in other already-announced tariffs on autos, copper, and lumber, the effective US tariff rate is estimated at 26.6%.

Market Reaction

• Equity markets dropped sharply on Thursday and Friday. Other major equity markets have followed the US down.
• Government bonds have risen as investors have sold risk assets and switched into safe-haven assets.

Economic Impact

• Inflation: We expect inflation to rise by a further 1.5% to 2% over the coming year.
• GDP: Could take a negative hit of 0.5% to 1%.
• Tariff evasion is more difficult due to the blanket application, increasing tariff pass-through (i.e., consumers feeling the price hikes more directly).

Global Trade Distortions

• Strategic supply chain shifts (e.g., moving final assembly to Vietnam to avoid Chinese tariffs) are now less effective or obsolete.
• The scale and uneven application of tariffs may severely distort global trade patterns.

Tariff Negotiations

• The US Treasury Secretary has indicated the tariffs should be considered a ‘cap’ and has invited negotiations.
• The exemptions of Canada and Mexico suggest openings for other countries to negotiate the same way they have in recent weeks.
• Outside of China, there has been a general absence of aggressive retaliatory action, giving credence to the hope cooler heads will prevail.
• The EU is planning a reply later today.

Long-Term Risks

• Could trigger a “weaponisation of capital” in response to trade weaponisation.
• Might cause repatriation of portable global capital, weakening a long-term US financial advantage.
• Raises policy uncertainty, which tends to negatively affect economic growth and damages US credibility due to questionable tariff rationale.

Our View

At Quartet, we started the year believing that the environment best supported global equities. Despite the challenges of higher bond yields, inconsistent US tariff policy, a change in sentiment towards AI, and concerns regarding growth, fundamentals still offered support. Currently, we remain in favour of risk assets but are mindful of the possibility that erratic US policies may lead investors to undergo an element of further de-risking. We also see the outlook for US and European economies returning to a more normal setting, implying that much of the US exceptionalism is perhaps being priced out. We are not reacting to market panic as Trump is erratic and unpredictable and likely to moderate some of his policies as central banks will not come to the rescue this time with the familiar bailouts.

At the margin, we are raising some cash for lower-risk clients by selling two positions in their Alternatives allocation which have been largely unaffected by the recent market turmoil.  We expect to re-invest in defensive assets in due course that should benefit from the longer-term inflationary effects of Trump’s tariffs.

Beyond the tariff turmoil we think that declining bond yields (rising bond prices) are a good thing for a heavily indebted US economy. $9.2tn of US Treasuries are maturing this year, so the ability to refinance at lower rates is key given that a slowing economy is likely to raise the Debt-to-GDP ratio. In the marketplace, there is even speculation about Trump’s true objective with this programme. Rumour has it that he is deliberately engineering a slowdown to allow the Fed to lower the policy rate ahead of the refinancing programme. The long-term stability of the US bond market is vital for the proper functioning of the US and the global economy, so there is some reason to be cheerful despite the discomfort of falling equity markets.

Regarding our US exposure, since Trump won the election we have been bullish on US long term growth but underweight equity exposure due to valuation concerns. The shift away from globalisation towards a potentially “zero sum game” characterised by mercantilism and protectionism was bound to be turbulent, and this is what we are now experiencing.

We all know that taking drastic actions in portfolios during a crash is normally the wrong move, yet many still make this mistake because it takes courage to fight this natural urge.

While the instinct to go to cash feels safe, history shows that staying invested (or even buying during crashes) tends to work out better. As Queen Mary wisely quipped, “To do nothing is the hardest job of all. And it will take every ounce of energy you have.”

Risk Warning

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