Stocks sell off as traders wake up to the realization that Trump’s new tariff options could be ‘highly punitive’ | Fortune

The initial reaction to the Supreme Court’s ruling on Friday had been one of cautious optimism, sending the S&P 500 up a respectable 0.69% by market close. The high court’s decision, which broadly curtailed the executive branch’s ability to unilaterally impose tariffs under a specific interpretation of the 1974 Trade Act (which had been the basis for many of the "Liberation Day" tariffs on a wide range of imported goods), was initially perceived as a boon for international trade. Companies had anticipated an immediate reduction in the cost of imports and a smoother global supply chain, boosting profit margins and consumer purchasing power. This sentiment was evident across various sectors, particularly those reliant on global supply chains, such as technology, automotive, and retail, which had seen their input costs rise significantly under the previous tariff regime.

However, the fleeting relief quickly evaporated over the weekend as President Donald Trump, known for his unpredictable and assertive stance on trade, signaled a dramatic counter-move. Instead of accepting the ruling as a limitation on his trade policy, Trump announced his intention to propose new tariffs, initially suggesting a 10% levy across a broad spectrum of goods, only to revise it upward to 15% hours later. This swift and defiant response caught markets off guard, transforming initial optimism into deep-seated apprehension. Analysts across the board began to recalibrate their assessments, realizing that the implications of Trump’s reaction would be far more intricate and potentially disruptive than the simple rollback of previous tariffs.

The shift in market sentiment was starkly reflected in Goldman Sachs’s proprietary "Risk Appetite Indicator," which tracks investor willingness to take on risk. After reaching a recent peak indicative of improved global economic outlook, the indicator sharply reversed course, sinking back down to levels associated with heightened caution. This retreat signaled that investors were rapidly pulling back from riskier assets, anticipating a period of significant economic and geopolitical uncertainty.

In this context of escalating apprehension, the perennial safe haven of gold experienced a significant resurgence. The precious metal rose 1.81% this morning, pushing its price per ounce towards an attempt at a new record high. Gold’s appeal is rooted in its historical role as a store of value during times of currency instability, inflation, and political turmoil. Investors, fearing potential currency devaluations from trade wars and a slowdown in global economic growth, flocked to gold, seeing it as a reliable hedge against the unknown. Other traditional safe-haven assets also benefited, with the Japanese Yen and Swiss Franc strengthening against the dollar, and demand for U.S. Treasury bonds increasing, pushing their yields slightly lower.

The profound shift in market psychology was perhaps best encapsulated by Paul Donovan, Chief Economist at UBS, who succinctly declared, "Welcome back uncertainty." Donovan’s comment highlighted the sudden return of a pervasive lack of clarity that had plagued global markets during previous periods of trade tensions. This uncertainty impacts corporate investment decisions, supply chain planning, and consumer confidence, often leading to delayed expansion plans, reduced hiring, and dampened economic growth. Businesses, unable to predict future tariff landscapes or the stability of international trade agreements, often opt for a wait-and-see approach, which can stifle economic dynamism.

BNP analyst William Bratton further elaborated on the daunting array of options available to President Trump, publishing a research note that summarized several "highly punitive" measures the administration might consider. Bratton cautioned that these actions could have far-reaching and severe consequences for global trade and economic stability. Among the potential retaliatory and re-assertive strategies outlined by Bratton were:

• Targeted Strategic Tariffs: Instead of broad-based tariffs, Trump could focus on specific strategic sectors crucial to national security or technological dominance, such as semiconductors, rare earth minerals, advanced manufacturing components, or pharmaceutical ingredients. These tariffs, potentially justified under different legal pretexts (e.g., national security concerns under Section 232, or emergency economic powers), would aim to force reshoring or diversification of supply chains, even at significant economic cost to U.S. companies and consumers.
• Non-Tariff Barriers and Regulatory Hurdles: Beyond direct tariffs, the administration could implement a suite of non-tariff barriers. This might include stricter import quotas, more rigorous customs inspections leading to delays and increased costs, enhanced regulatory compliance requirements for foreign goods, or even the weaponization of environmental and labor standards to disadvantage imports. Export controls on sensitive U.S. technologies to specific countries could also be tightened, hindering their industrial development.
• Currency Manipulation Accusations and Retaliation: The U.S. Treasury could formally label more trading partners as currency manipulators, opening the door for retaliatory tariffs or other punitive measures. This move, while contentious, could be used to pressure countries perceived as gaining an unfair trade advantage through undervalued currencies.
• Withdrawal from or Renegotiation of Multilateral Agreements: Trump could threaten to withdraw the U.S. from existing multilateral trade bodies, like the World Trade Organization (WTO), or pursue aggressive renegotiations of bilateral and regional trade agreements. Such actions would further dismantle the post-war global trade architecture and replace it with a more fragmented, bilateral approach where U.S. leverage could be maximized.
• Investment Restrictions and Sanctions: The administration might also expand restrictions on foreign direct investment in key U.S. industries and impose financial sanctions on companies or individuals deemed to be undermining U.S. trade policy or national interests.

Bratton argued that Asian companies, in particular, would react to this escalating uncertainty by increasingly detaching themselves from U.S. trade-centric supply chains. "We expect U.S. trade policy to become increasingly complex and more targeted, resulting in a patchwork of tariff measures and trade agreements," he told clients. This fragmentation, he predicted, would lead to a significant reorientation of global commerce: "The global economy will continue to fragment with U.S. trade flows steadily becoming less important as Asian trade becomes increasingly more regional in nature." This trend, already observed in the wake of previous trade disputes, would accelerate the development of robust intra-Asian supply chains and trade blocs, such as the Regional Comprehensive Economic Partnership (RCEP), making these economies less vulnerable to shifts in U.S. policy.

The Supreme Court ruling—and President Trump’s subsequent reaction—triggered a cascade of reviews among dozens of countries, all scrambling to clarify the status and validity of their existing trade agreements with the U.S. The legal basis for previous agreements and ongoing negotiations suddenly appeared ambiguous, demanding immediate reassessment.

This uncertainty immediately impacted ongoing diplomatic efforts. According to Peter Schaffrik and his team at RBC, "The European Parliament’s trade committee was due to approve the EU-U.S. Transatlantic Digital Trade Agreement on Tuesday, a landmark deal aimed at standardizing data flows and digital services between the two blocs. But the committee’s chair, Bernd Lange, signaled that approval would likely be postponed as it seeks clarity on U.S. trade policy." The EU, valuing regulatory predictability and legal certainty, could not proceed with ratifying an agreement when the very framework of U.S. trade authority was in flux. Similarly, India announced that it would postpone crucial talks with the U.S. scheduled for this week. These discussions were aimed at finalizing an interim U.S. trade deal that promised to lower tariffs on specific agricultural products and facilitate market access for Indian goods, while addressing U.S. concerns about intellectual property rights. The Indian government cited the need for "greater clarity on the future direction of U.S. trade policy" before committing to any new agreements.

Here’s a snapshot of the markets this morning, reflecting the global unease:

• S&P 500 Futures (US): Down 0.22%
  • Rationale: Anticipation of a difficult trading day as investors grapple with renewed trade uncertainty and potential economic slowdown.
• Nikkei 225 (Japan): Down 1.85%
  • Rationale: Japanese exporters, highly sensitive to global trade conditions, faced significant headwinds from the prospect of new U.S. tariffs and a stronger Yen.
• Hang Seng Index (Hong Kong): Down 2.10%
  • Rationale: Greater China markets particularly vulnerable to U.S. trade policy shifts, with investor confidence eroded by potential for increased tariffs and supply chain disruption.
• DAX (Germany): Down 1.55%
  • Rationale: European markets, heavily reliant on exports, reacted negatively to the prospect of a fractured global trade environment and potential U.S. tariffs impacting European goods.
• FTSE 100 (UK): Down 1.20%
  • Rationale: Similar to other European markets, the UK index suffered from global trade concerns, exacerbated by its own economic uncertainties.
• US Dollar Index (DXY): Down 0.35%
  • Rationale: The dollar weakened against a basket of major currencies as global investors sought safer alternatives and worried about the U.S. economy’s stability under renewed trade conflict.
• EUR/USD: Up 0.25% (Euro strengthened against Dollar)
  • Rationale: While European stocks fell, the Euro saw some relative strength as the dollar weakened, possibly reflecting a perception of the EU’s more stable trade policy framework despite the current disruptions.
• USD/JPY: Down 0.40% (Yen strengthened against Dollar)
  • Rationale: The Japanese Yen, a traditional safe-haven currency, benefited significantly from the flight to safety.
• GBP/USD: Up 0.15% (Pound strengthened against Dollar)
  • Rationale: Similar to the Euro, the Pound gained marginally against a weakening dollar, though its gains were capped by broader UK economic concerns.
• Gold (Spot Price): Up 1.81% to $2,385 per ounce
  • Rationale: Strong safe-haven demand amidst heightened uncertainty, pushing prices towards record levels.
• WTI Crude Oil (Futures): Down 1.10% to $78.20 per barrel
  • Rationale: Concerns about slowing global economic growth due to trade conflicts typically depress demand for oil.
• US 10-Year Treasury Yield: Down 3 basis points to 4.28%
  • Rationale: Increased demand for safe U.S. government bonds pushed yields lower as investors sought security amidst equity market volatility.

The markets are now bracing for a protracted period of elevated volatility and geopolitical maneuvering. The Supreme Court’s ruling, intended to clarify the bounds of executive power, has paradoxically unleashed a new wave of unpredictability, with President Trump’s determined response setting the stage for a trade landscape far more complex and potentially perilous than anything traders had initially imagined. The path forward for global trade, supply chains, and international cooperation remains shrouded in a fog of uncertainty, leaving investors, businesses, and policymakers grappling with an evolving and increasingly fragmented economic order.