A market rout made in the White House

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On Monday morning traders woke up to signals of carnage across their screens. Hong Kong’s Hang Seng index closed down over 13 per cent, marking its worst single-day fall since 1997. In Europe, the UK’s FTSE fell to a one-year low and at one point Germany’s Dax was down 10 per cent. Then, as US markets opened, the S&P 500 plunged 4 per cent, having already shed $5.4tn in market value since US President Donald Trump unveiled what he called his “liberation day” package of tariffs to the world on April 2.

Before last week, investors had been rebalancing their portfolios away from the US. Europe was buoyed by plans for higher defence spending, while tech optimism boosted stocks in China. But Trump’s worse than expected plan to push US effective tariff rates to their highest in over a century spares no one. Is he really serious? And if so, how do you put a price on the world’s largest economy withdrawing from the global trading system? That is what investors are now trying to answer.

The unequivocal conclusion is that Trump’s tariffs have raised the chance of a US and global recession. The sell-off now risks metastasising. In America, junk bond spreads have jumped, hedge funds have been hit with hefty margin calls and as the Financial Times has reported, large institutional investors may be on the cusp of selling stakes in illiquid private equity funds. Jolts in US markets will spread far and wide. The pain will not be limited to the wealthy. Pension savings and retail investors’ post-pandemic spoils are eroding. Slumping company valuations will have knock-on implications for jobs.

What could stop this becoming a downward spiral? Trump would need to reverse his tariff plans. But the White House seems blindly dedicated to the programme. (On Monday, Trump mentioned the prospect of negotiations, but also threatened a further escalation of China tariffs.) US Congress does not yet have the unity or the tools to push back on the president’s protectionist plans either. Fiscal policy is also unlikely to be a saviour. Any stimulus will be restrained by America’s current indebtedness, volatile Treasury yields and uncertainty over tariff revenues. The US Federal Reserve is in a bind too. It could cut interest rates to prop up the domestic economy and stocks, but it also fears a tariff-induced inflation spiral.

Then there’s Wall Street. As Trump started his second term, financiers were optimistic that his policies to slash tax and red tape would boost activity. With the Trump administration prioritising tariffs, the mood is now shifting. On Sunday, hedge fund billionaire Bill Ackman, normally a staunch backer of the president, warned of an “economic nuclear winter” unless protectionist plans were paused. JPMorgan Chase chief Jamie Dimon’s annual letter to shareholders published on Monday voiced fears of a recession. Bankers, tech executives and business groups with the president’s ear must now urge him to scale back his plans. Whether he will listen is another matter.

Otherwise, there is the troubling prospect of something breaking in financial markets before the White House decides to act, if at all. US asset valuations have become undeniably overstretched since the pandemic. Expensive tech stocks and tight spreads on corporate bonds have been due a price correction. But Trump’s policies, if sustained, throw a grenade into that process. Asset values could now unwind in a highly uncertain and disorderly manner across the world. Hidden vulnerabilities lurk throughout the shadow banking system.

Trump believes that the path to “bringing wealth back to America” involves redirecting trade and financial flows that have in reality underpinned its prosperity for decades. If he doesn’t correct course, he will soon learn that he does not command the tide. Americans and the world will pay the price for his folly.