Pity traders. On Monday, the financial world had to literally wait until the 11th hour for the finale of “will he or won’t he?”. Eventually, with mere hours to go, deals to delay tariffs on America’s two biggest trading partners by a month were announced following separate bilateral calls between Trump and Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau.
Markets whipsawed and battled to keep up. The largest exchange rate market in the world, the Euro USD, bounced around like an emerging market currency; initially, the USD rose to its highest level in two years to the Euro, before plunging as soon as the announcements were made. And yet, tellingly, the USD is still 60 basis points (0.6%) stronger than it was before the tariff furore was announced.
Other assets experienced similar volatility, but generally ended up weaker. The US benchmark S&P 500 bombed 2% when markets opened on Monday, but clawed back ground to almost a percent lower than where it closed at the end of last week.
Bitcoin, ever a Trump proxy on risk, was roundly and somewhat inexplicably smashed when the tariffs were announced. It sold off from above $100,000 to barely $92,000, before staging a comeback on the news that the president had been bluffing all along. And yet it is still well below earlier levels, trading at $98,000 at the time of writing.
A negotiation strategy
The chorus of his die-hard supporters, that Trump’s rhetoric on tariffs is merely part of his negotiating strategy, was heard loud and clear. According to this narrative, Trump is not actually going to destroy the Western rules-based liberal order, he was merely using hard bargaining with tariffs to ensure that America supposedly gets a fair deal from the system. Haven’t the odds been stacked against the global hegemon for decades? The Art of the Deal, once more.
But as the smoke lifts from the tariff fiasco and weary traders head back to their East Village apartments, there can be little doubt of the damage that has been done. After two weeks of his presidency, three things are becoming clear.
First, while he has (at least partially and temporarily) stepped back from the metaphorical big red button, markets took fright. Then, although they stabilised, they did not go back to where they had been.
Clearly, there is now a “Trump Unpredictability” discount priced into markets. The Trump trade, which led to such “irrational exuberance” at the end of last year, has fizzled out. Markets are now bruised and trading sideways, warily looking for the next bout of Trump-induced volatility.
One of the most common delusions about Trump is that he would do all the things that markets like, and none of the things they do not like. Repeatedly, investors and commentators have remarked that he “measures himself” on how the US stock market is doing, even talking about a “Trump put”. Well, if that is the case, he seems to have become momentarily distracted.
But such uncertainty is not just bad for markets, it is bad for the economy. Growth hates instability. From Saturday night, when he announced the tariffs, to Monday evening, thousands of businesses across America were genuinely not sure if they could operate come Tuesday morning.
From the largest motor manufacturers like General Motors, whose supply chains would be nutmegged, right through to the smallest Mexican avocado producers who supply 90% of the guacamole in the US (and with the Super Bowl on the horizon, this is a particularly busy time for avocado trading), making long-term investment decisions in such a context is impossible. This will have real impacts on GDP, tariffs or no tariffs.
Second, while he is a dealmaker and particularly adept at bluffing, real and consequential decisions are being made. The 10% tariff on China – which comes on top of existing levies – came into effect on Tuesday, 4 February. On Monday, 3 February, Trump described those duties as an “opening salvo” in his renewed trade offensive against the world’s second-largest economy.
Such measures will raise inflation and lower demand in the US, almost ensuring that another interest rate cut this year is off the table (bar any sudden downturn in economic activity).
The Elon factor
Furthermore, material shifts are happening within the way the world’s largest economy is managed. Elon Musk, Trump’s chief crony with little official authority, has taken control of the federal payments system and seems willing to use it to impose policy at whim. Over the weekend, he threatened to cut off payments to a Lutheran charity organisation that provides foster care and helps retirees, solely because it also runs programmes for immigrants.
Above and beyond the blatantly worrying democratic implications, while controlling the public payments system doesn’t equate to controlling the dollar, it is deeply concerning that such a critical function of the Treasury could be taken over so easily. Any misstep with the public finances, particularly involving debt management, could be catastrophic.
Finally, there are the effects on international relations. In the same way that motor manufacturers will have to reconsider relations with the US, so too will America’s allies and its competitors. Uncertainty in any relationship, from a friendship to marriage to geopolitics, is unhealthy.
European officials have long since lost patience with their tempestuous former North Atlantic partner. For European businesses, the threat of losing American markets will make the Chinese market look ever more necessary. Almost certainly, conversations between EU policymakers and the Chinese are already taking place.
Perhaps most ironically, at least from a South African perspective, is that Musk seems, along with fellow South African advisers Peter Thiel and David Sacks, determined to hit at the place of their birth. It is undoubtedly true that recent social media posts on South Africa’s “openly racist” laws and the threats to “cut funding” are pure noise and distraction. But the intention is there, and South Africa has been singled out.
More critically, at this point, any hope that Agoa might be extended with South Africa remaining part of it after June is looking naively optimistic.
Joe Biden, for largely geopolitical but also economic reasons, was arguably the most disastrous post-war president of the United States. However, at least one knew what one was dealing with.
Two weeks into the second term of President Donald J. Trump, chaos reigns. It might be worth asking Trump supporters, particularly those in South Africa, how they think it is going so far? DM