Risk Falls As Tariffs Realized, Liquidity A Major Concern
Markets react as Trump issues Tariffs, near-term pain?
Risk assets have sunk on the futures open with NASDAQ futures down as much as 2.6% and the DXY soaring 98 bps through 109.40.
The EURUSD collapsed to 1.0212 after, again, failing to maintain momentum meaningfully above 1.04.
Market participants are trying to weigh the affects of the long choreographed tariffs issued by President Trump. With 25% placed on Canada (10% on Canadian oil) and Mexico . China was hit with a 10% tariff. The prior countries have threatened to retaliate with tariffs of their own while struggling China looks to negotiate better trade terms.
The PBOC is currently trying to hold the yuan down at 7.24 as tariffs are realized, but how long can they keep this up? The offshore yuan (CNH) is breaking out as traders expect the yuan to loosen under the stress.
President Trump has labeled thse tariffs as a “national security” measure to stop drug and human trafficking through the northern and southern border and prevent fentanyl coming from China.
Market consensus is that these tariffs are likely to be short-lived and affects on the markets and economy will not be impacted greatly. However, it's estimated that tariffs will reduce the U.S. GDP by 1% and cause consumer prices to go up.
Below, I'll go over the updated liquidity picture and how it'll affect rates and the dollar, as well as draw some parallels from Trump Trade War 1.0 and what we could expect going forward.
We also need to do over the potential disinflation wave that may come over the coming months.