By JAMES SPENCE
Based on what was announced in the Rose Garden of the White House, US tariffs move from a weighted 2.5% to 29%.
Higher than the Smoot-Hawley Act of 1930 which ran to 20% on a weighted basis. This will have historians scurrying to re-describe pre-WWII America where American First was a movement with Joseph Kennedy and Charles Lindbergh at its helm.
The initial impacts have been significantly negative if not cataclysmic. Optically large on frontline equity indices and stocks but more significant, perhaps, on the US dollar and world currencies. There is still a sense, to this writer, that markets are trying to look around these tariffs and second guess their durability. Once big business and money gets into the Oval Office, and the drumbeat of awful economic data begins to tell, is Trump truly tough enough to hold the line?
The opposing argument is that autocrats should be taken on their word. Trump’s long voiced grievance about trade imbalances indicates he sees this as his chief work and 2nd April was the promulgation of the plan, first hatched in younger Donald’s mind.
Under either scenario, the environment is far from easy for investors. The normal backstop supplied by the Federal Reserve is unlikely to be in play. Faced with the same set of uncertainties and a spike in US inflation – economists suggesting overnight this could be between +1% to +2% on core inflation which is currently 3% – the Fed will likely sit tight with current rates and their bias might swerve from holding and waiting to holding and considering a raise.
The most impactful one day move has been in the USD which has fallen by 2% against a basket of world currencies. Economics students are generally taught, that in most scenarios, the tariff setter experiences a strengthening currency so a softening dollar bodes otherwise. It indicates capital flight and a weakening of the dollar’s position.
The methodology revealed by Secretary Lutnick and his many coloured board of countries revealed in the Rose Garden has Cambodia top on the day at 49%, Vietnam next at 46%, China at 34% (add the previous 20% to reach 54%), Europe at 20%, Russia absent (sanctions being in place) and UK a “mere” 10%. For that we have perhaps King Charles, Lord Mandelson and the FCO to thank, if thank is the right word.
Mexico and Canada were exempted as the US administration is choosing, for now, to work within USMCA rules (United States-Mexico-Canada Agreement). Pharma, lumber, copper and semiconductors were excluded. This – at country and sector level – reflects pressure points, key inputs and a wish to avoid food shortages in the US. Gold was also excluded.
To gauge the initial moves, we list US and European top fallers during daytime trading on 3rd April.
US: Dell Technologies (-13.8%), Deckers (-13.5%), Dollar Tree (-11.7%), Apollo (-11.7%), Nike (-10.9%), HP (-10.4%)
Europe: Pandora (-12.4%), Logitech (11.1%), Adidas (-10.1%), Puma (-9.8%), Volvo (-8.9%), AP Moller-Maersk (-8.0%), Standard Chartered (-7.6%)
UK: Vietnam Holding (-12.3%), Watches of Switzerland (-11.1%), Vinacapital Vietnam (-8.6%), Standard Capital (-7.5%), Ithaca Energy (-6.9%)
What will companies do? They will increase prices because, beyond some margin sacrifice, they will have to. As they do, they will be worried about consumer demand. The US auto makers have been told by Trump not to do this so they find themselves in a jam.
Far from boosting capex demand, as Trump claims it will and used some very ropey data to support his claims, we will likely see some weakness in capex. This could provide cover for the hyperscalers (Amazon, Alphabet, Meta & Microsoft) to scale back. Possibly not so hyper, after all. We had prudentially scaled back microchip holdings in the Global Leaders and Pacific strategies in past weeks.
What of the reactions?
China will surely retaliate, and will they also consider a devaluation of the RMB? In recent months, China has targeted the US agricultural sector and may extend these moves. We have made recent investments in BYD (a company that does not sell its products in the US) in both Global Leaders and Pacific.
Europe will also wish to retaliate. The UK, flexing its independence and less in the spotlight, had indicated it will not retaliate but Prime Minister Starmer stated on April 3 that “nothing is of the table”. The UK and India, separately, are engaged in trade talks with the US.
Canadian consumers are voting with their grocery bags.
Looking a bit further ahead, the rest of the world has more reasons to cooperate. China might see itself, in a certain guise, as a goodish actor in this brew. Good but for the looming issue of Taiwan.
As to the US itself, supporters of the administration, and administration officials themselves, argue that there will be a temporary shock, Treasury Secretary Bessent speaking of a necessary “detox”. The detox will be leavened by deregulation and a capex boom and the workers needed to staff the boom will be recycled from the government sector. It all sounds a bit fanciful. The key data to watch in this regard will be true indications of capex intentions, not the trumped-up list. Is Meta good for the touted US$500bn?
There have been a number of position level changes over the past few weeks that now look prudential at the end of this week. The core multi-asset strategy has been set at the low end of its equity guide weight of 60%, is well diversified and is accenting value. The Global Leaders strategy is running an underweight US position and recently scaled back Microsoft and Asian chip companies. It owns no Mag-7 stocks other than Microsoft, possesses more knowledge based, data heavy companies than any time in its history and owns great companies such as Linde whose plants are in-country rather than cross-border. Pacific has re-engaged with new China weights (more domestically oriented companies) and had reduced Japan which was unexpectedly harshly treated by the manner in which tariffs were calculated.