US stock indices fell sharply yesterday after President Donald Trump’s sudden announcement of sweeping new tariffs. Late in Monday’s session, Mr Trump revealed a fresh 25% tariff targeting Japan and extended “reciprocal” tariff measures to 13 additional countries, triggering a wave of risk-off sentiment across Wall Street. Smaller stocks led the pullback, a fact illustrated by the 1.6% sell-off in the Russell 2000.
The Dow and NASDAQ both lost 0.9% while the S&P 500 dropped 0.8%. While not a huge pullback, the selling was enough to disrupt what had been a remarkably smooth run higher for equities, since the reciprocal tariff lows hit back in April.
Source: TN Trader
Earlier in the day, President Trump issued an executive order extending the reciprocal tariff deadline to Wednesday, 1st August, citing fresh recommendations from senior officials. With 14 countries now facing the threat of significant trade penalties, investor attention is shifting to how, or if, these nations respond ahead of the new deadline.
The VIX showed little sign of concern despite yesterday’s tariff-driven volatility. The lack of a spike suggests markets are interpreting the latest trade tensions as a negotiation tactic rather than an imminent threat. While volatility could resurface quickly if rhetoric intensifies, it would appear that there are few concerns over the tariff outcome, for now.
Following Monday’s late-session dip, US stock index futures were showing signs of stabilisation this morning. The mild rebound overnight is further evidence that investors are prepared to look past the latest round of tariff threats for now.
With the deadline for trade negotiations pushed out an additional three weeks, investors seem confident that the Trump administration will continue to be flexible when it comes to its tariff timetable. That suggests that the US will work to avoid a situation which could trigger a significant sell-off across risk assets.
That means the markets can concentrate on the earnings season, which kicks off properly early next week. For now, markets appear content to tread water. But the growing list of tariff threats and political friction means headline risk remains elevated, but pushed to the sidelines thanks to another deadline postponement.
Investors are also looking to the trade deals done so far for clues about future deals. Broadly speaking, ignoring all the complexities of exemptions and other specific rates for certain goods, the UK got away with a 10% baseline, while Vietnam faces 20%.
Could these be the parameters within which other deals fall? If so, then investors feel they can breathe easy. China is a special situation and one that bears further consideration. The ‘framework’ talked about so far offers few clues to what may end up being in a comprehensive trading arrangement.
