Donald Trump’s tariff ‘shock regime’ tests Wall Street’s mettle
US president backed off his threat of new duties on European economies after market tumult
Ian Smith, Jonathan Vincent and Emily Herbert in London and Kate Duguid and George Steer in New York
© FT montage/AFP/Getty ImagesDonald Trump’s retreat from his tariff threats over Greenland this week followed a sharp stock sell-off, underscoring investors’ power to influence the US president even as he brushes off Washington’s top allies.
US stocks shed more than $1tn on Tuesday in one of the worst sell-offs since Trump’s “liberation day” tariff announcement in April.
The president shrugged off the fall as “peanuts” compared with the market’s gains over the past year but he ditched his plans for steep levies on the UK, France, Germany and others by Wednesday afternoon.
“There is certainly a sensitivity in the administration about what happens in the stock market,” said Kristina Hooper, chief market strategist at Man Group, an investment firm with $214bn in assets under management.
“That was clearly on display in the decision to back down,” she added.
Karl Schamotta, chief market strategist at Corpay, said Trump’s comments on Wall Street’s reaction to his threat to punish Europe for not surrendering to his demands for control of Greenland were a “signal that this hit him where it hurts”.
The U-turn was the latest example of financial markets’ apparent power to tame Trump — a phenomenon widely known as Taco, or Trump always chickens out.
It also shows how investors are being forced to second-guess the president’s pain threshold, and in the process becoming inured to more extreme policies.
“Taco thinking is now deeply entrenched in markets,” said Jason Bobora-Sheen, a portfolio manager at Ninety One.
“Investors are convinced that Trump is the boy who continually cries wolf.
The risk for markets one day is that this dynamic provides enough room for the wolf to get closer than intended.”
White House spokesperson Kush Desai said: “Anyone who doubts President Trump’s willingness to put his money where his mouth is when others refuse to strike a deal should go ask Nicolás Maduro or Iran for their thoughts.”
Investors first learned the ‘Taco’ lesson in the market turmoil that followed liberation day, when the scale and scope of Trump’s trade war shocked investors.
The announcement sent US stocks reeling and also knocked the Treasury market as the trade skirmish undermined confidence in the US’s haven status.
The rebound was equally fierce, stinging investors who had dumped their equities as markets swooned.
Since then, market reactions to Trump’s radical policies have become more muted, with investors reluctant to overreact to his aggression on trade or hectoring of Federal Reserve chair Jay Powell.
“The difference between now and then is that Trump now has much less political capital,” said Luca Paolini, chief strategist at Pictet Asset Management.
“The midterm elections are approaching, so the pain threshold is much lower.”
This can embolden the targets of Trump’s policies, others say.
“If I were an adviser to some European governments, I would say: you almost need to create a little bit of market volatility because Donald Trump cares for that a lot, more than other politicians,” said Michael Krautzberger, chief investment officer for public markets at Allianz Global Investors, before Trump’s climbdown this week.
On Thursday, as Trump was returning to the US, the S&P 500 index closed up 0.6 per cent.
Futures point to decline of 0.2 per cent at the open on Friday.
Global investors have grown used to the pattern of these pronouncements, which typically are announced on a weekend when stock, bond and currency markets are closed.
Charles-Henry Monchau, the CIO at Swiss bank Syz, described a “Trump tariff cycle timeline” of four to six weeks, starting with the “shock regime”, sending stocks down and volatility up, followed by reassurances by US officials and ending with promises of resolution.
“This time [on Greenland], it was much shorter,” Monchau said.
“Maybe because the stakes for everyone are just too high.”
Other episodes include a one-day dip in the dollar last July when it emerged Trump had asked lawmakers about firing Powell from the Fed.
The greenback tumbled before rebounding after the president said he was “not planning on doing anything”.
Some investors worry the Taco expectation is so widely held that the market’s ability to react to economic or political shocks is being dulled.
At the height of the Greenland crisis, one investor in the government bond market, where the reaction was more muted, said they were trying to “actively avoid all Greenland noise”.
For some who invest across various financial markets, the answer to the question is to tactically reduce exposure ahead of high-risk speeches and other events, while keeping a longer-term holding in gold and other commodities that might benefit from the growing uncertainty.
The precious metal extended its record-breaking rally this week, rising even after Trump’s Greenland volte-face to trade at nearly $5,000 a troy ounce.
Trevor Greetham, head of multi-asset at Royal London Asset Management, said he has been buying gold as a hedge against the risk that Trump follows through with some of his more extreme policies, such as curbing the Fed’s independence under Powell’s successor.
“It feels a little bit like the market is a frog in the pan of water, when the heat is going up,” he said.
“[The risk is] you are becoming immune to triggers that would have caused quite a big sell-off 10 or 20 years ago.”
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