President Trump imposed new 30% tariffs on Mexico and Europe, yet markets continue to operate near all-time highs, indicating investor belief in a possible resolution. Concerns have arisen regarding the Federal Reserve's response, as controlling inflation might take precedence over supporting the stock market. Despite some selling activity, major indices remain strong. Analysts suggest the market is betting that tariff threats will be negotiated down. However, potential for volatility exists if substantial tariffs are imposed unexpectedly, leading to possible shifts in market stability.
"Markets are clearly not pricing in these higher tariffs, and we may only know the outcome in the final hours, offering the potential for a sharp market reaction and heightened volatility," DB's Henry Allen told clients.
"To be fair, a month ago Trump threatened the EU with a 50% tariff so you might argue this is an improvement! The market will generally think this is mostly a negotiating tactic and that we're unlikely to see such rates," he told clients.
"However at some stage, someone's bluff could be called. Trump is under less pressure to back down with US risk markets around their highs and bond markets relatively stable at the moment."
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