President Donald Trump’s threats of fresh tariffs against Apple and the European Union brought trade tensions back into the spotlight ahead of a long holiday weekend, just when investors thought they might relax from the tariff jitters.
As they navigate a volatile macroeconomic environment with worries about rising U.S. government debt, high yields for long-dated Treasurys, and a spike in Japan’s bond yields that could lead to further outflow from U.S. assets, stock market investors are reminded that tariffs will probably continue to play a role this summer.
James Knightley, chief international economist at ING, wrote in a note on Friday that the theme driving the market this week will be the “escalation – de-escalation and now re-escalation” of Trump’s trade battle.
Knightley said this in response to Trump’s Friday warning to put a 25% tariff on Apple (AAPL) for any iPhone sold in the United States but not manufactured there, and a 50% duty on the European Union, which would take effect on June 1.
After trade progress had sparked a market surge, the move rekindled investor concerns that the new tariffs could cause inflation to pick up speed again and impede U.S. GDP. Trump put a 90-day hold on reciprocal tariffs for the majority of nations, with the exception of China, last month. The United States and China agreed to temporarily lower their tariffs on one another earlier this month.
After Trump first announced his plans for reciprocal tariffs on April 2, stocks fell sharply, but he quickly recovered when he started reducing or postponing the penalties.
However, “the uncertainty doesn’t seem to be going away,” according to Richard Flynn, managing director of Charles Schwab UK, given Trump’s promise to impose additional tariffs.
Flynn stated over the phone that “nearly every major market is still subject to pullbacks if trade talks fail between the countries,” even though the market reacted “very positively” to any pauses in tariffs and the progress in trade conversations earlier.
Specifically, “the longer the tariffs are in place at those elevated levels, the more you’re risking things like higher inflation or lower growth,” stated Charlie Ripley, Allianz Investment Management’s senior investment strategist.
Positively, Ripley pointed out that tariffs haven’t yet caused a significant rise in the inflation rate. According to the Federal Reserve’s favored indicator of price increases, the personal consumption expenditures price index, inflation slowed to 2.3% year over year in March. Another key indicator of inflation, the 12-month growth in the consumer price index, dropped to 2.3% in April from 2.4% in March, marking the weakest increase since 2021.
Investors will be keeping an eye on this week’s April PCE data, which is due on Friday.
Additionally, several investors claimed that Trump’s tariff threats are only a negotiating ploy. According to Jamie Cox, managing partner at Harris Financial Group, the president is unlikely to allow the tariffs to actually harm the economy, as seen by the pauses in his initial round of taxes. Cox stated in a call that the market still has opportunities since Trump may negotiate trade agreements with other nations in the future, in addition to the one he signed with the United Kingdom earlier this month.
The Dow Jones Industrial Average DJIA closed at 41,603.07, down 1051.67 points, or 2.5%, as U.S. markets concluded the week down. The S&P 500 SPX ended the week at 5,802.82, down 155.56 points, or 2.6%. The Nasdaq Composite COMP ended the week at 18,737.21, down 473.89 points, or 2.5 percent.
While reversing their initial losses, the three major indices all ended Friday lower as investors questioned if Trump’s planned tariffs would be enacted. “I would be shocked if these proposed tariffs are imposed,” stated Louis Navellier, Navellier & Associates’ founder and chairman.
However, rising worries about the U.S. government’s enormous debt and high yields on long-dated Treasurys are also putting pressure on stocks. As of last Friday, the 30-year Treasury yield was above 5%, which was generally bad for stocks because it made borrowing more expensive for businesses.
After Moody’s stripped the U.S. of its last triple-A rating, a $16 billion auction of 20-year Treasury notes yielded poor results last week, reflecting a number of issues that affected bond investors’ mood. A tax and spending measure that would implement the majority of Trump’s legislative agenda and is expected to considerably increase the deficit was also approved by the U.S. House of Representatives last week.
In a recent report, George Saravelos, head of FX research at Deutsche Bank, stated that although the U.S. saw an increase in both Treasury yields and equities in 2023 and 2024, it is unlikely to materialize today. At the time, the U.S. growth rate was revised higher than anticipated, which caused both stocks and Treasury yields to rise.
However, the current increase in rates is a result of worries about the growing U.S. debt deficit rather than growth confidence. “It is all a building fiscal risk premium into US assets,” commented Saravelos.
The recent turbulent increase in Japan’s bond yields has made matters worse.
The yen-funded carry trade, which involves borrowing in yen to purchase a higher-yielding currency, such as the dollar, which was then invested in U.S. Treasurys, has been largely carried out by Japanese financial institutions, which are well-known for being large purchasers of U.S. Treasurys.
However, the unwinding of the carry trade may result in a significant withdrawal from U.S. financial assets if domestic investors are drawn back by the significantly higher rates on Japanese government bonds.
“What should concern holders of USTs (U.S. Treasurys) and USDs (U.S. dollars) now is that, at some point, JGB (Japanese government bonds) yields are allowed to rise far enough that it triggers a sudden rebalancing of Japan’s institutional portfolios out of USTs and into JGBs,” the strategists at Macquarie Group wrote in a note on Thursday
In addition, seasonality tends to act against stocks throughout the summer.
According to Dow Jones Market Data, the S&P 500 has gained 1.2% on average since 1950 during the summer, compared to 2.4% in the spring, 2.2% in the fall, and 3.1% in the winter, making July the worst season for stock performance.
