'Will He Or Won't He' Tariffs Conundrum Keeps Investors On The Edge

(MENAFN- Gulf Times) Just as investors suspect that President Donald Trump' tariffs will once again be used as a bargaining chip and may not be as severe or immediate as feared, the growing threat and uncertainty are depressing market sentiments.
The Wall Street has been guessing“will he or won't he” on tariffs since trump took office last month promising sweeping levies on geopolitical allies and rivals alike.
While the initial reaction in the Stock market was caution, the mood is shifting as the administration's policies become increasingly muddled with delays and exclusions mixing with bellicose rhetoric.
So far, investors have been ignoring the noise and buying stocks.
While the risk of a global trade war remains dangerously real after Trump announced 25% levies on steel and aluminium imports that will take effect in March and reciprocal tariffs on numerous trading partners that are expected to hit in April, equity indexes continue to rally, with the S&P 500 Index finishing last week within points of an all-time high.
From bonds to credit and equities, a standard pattern is emerging in a world beset with uncertainty. Jarring day-to-day swings set an emotional tone for investors - only to dissipate as the sessions wear on.
Stocks, meanwhile, closed near all-time highs on Friday, with tech sentiment of late proving particularly febrile.
“As investors realise that the tariffs are likely not going to be as punitive as expected, that is good news relative to expectations,” said Andrew Slimmon, portfolio manager at Morgan Stanley.
Still, Slimmon noted that weak market sentiment suggests investors remain fearful of the risks in the administration's plans. A trade policy uncertainty index has spiked to its highest since 2019, when a similar trade war was brewing.
Trump during his first term imposed tariffs of 25% on steel and 10% on aluminium, but later granted several trading partners duty-free exemptions, including Canada, Mexico and Brazil. Mexico is a major supplier of aluminium scrap and aluminium alloy.
Former President Joe Biden later negotiated duty-free quota arrangements with Britain, the European Union and Japan. It is not immediately clear from Trump's announcement what will happen to those exemptions and quota arrangements.
The tariff conundrum is undermining the popular trade of betting on the dollar.
Bloomberg's gauge of the greenback slid to a two-month low on Friday after Trump ordered his administration to consider reciprocal tariffs to rebalance trade relations, efforts that may take weeks or months to complete.
That's adding to the conviction the levies are more of a tactic to gain a better deal than an end in themselves, and reducing the prospect of quicker US inflation that has boosted the dollar.
Corporate America, which is in the midst of the fourth-quarter reporting season, is also striking a cautionary tone on trade tensions.
Ford Motor Co said last week that Trump's 25% tariffs on Mexico and Canada, which have been pushed back to March 4, will blow a hole in the US auto industry. On Friday, Trump said he would unveil a separate set of tariffs on automobiles“around April 2.”
That said, it isn't as if Wall Street is completely ignoring tariff risk. Rather, it's led to more selectivity in stock picking.
The overall result is a steady - if improbable - fall in pan-market turbulence, even as some measures of policy risk imply a backdrop as unsettled as any in nearly three decades.
The dynamic has played out repeatedly over the previous two presidential administrations, when everything from Covid to Federal Reserve rate hikes and Trump's trade bluster failed to dent Wall Street's risk-on march.
The question now is whether the buyers spurring these gains are appropriately assessing what Trump will do - or dangerously throwing caution to the wind.

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