Are markets becoming immune to tariff shocks?

by Richard Henderson, Katia Dmitrieva and Swati Pandey

US President Donald Trump threatened to double the baseline universal tariff to 20%, citing record stock gains to dispel fears that such a move would hammer the global economy. 

Financial markets edged lower but the relatively subdued reaction showed the extent to which traders have become desensitized to the economic dangers - something that could lead to a reckoning in markets further down the line. 

Trump told NBC News Thursday he’s considering a flat tariff of 15-to-20% on all trading partners, higher than the current 10% rate and analyst expectations. That was on top of new levies on Canada and followed steep rates on Brazil earlier in the week. 

“I think the tariffs have been very well-received,” NBC quoted Trump as saying. “The stock market hit a new high today.”

Contracts for the S&P 500 and European stocks both fell on Friday, while the dollar strengthened against most major peers and the yen fell. 

The US stock market’s rise to a record high hasn’t been smooth. The S&P 500 nearly plunged into a bear market in April while the Nasdaq 100 did hit that level following Trump’s “Liberation Day.” Despite the recovery, US benchmarks are trailing global equities this year as trade uncertainty and the impact of tax cuts on the country’s deficit stoked doubts about its exceptionalism in global markets. 

But in a sign traders have become less sensitive to tariff developments recently, the CBOE VIX index of US equity volatility this week dropped to the lowest since February, while an equivalent measure of fluctuations in the Treasury market fell to the lowest since 2022. The S&P 500 Index set another record high, as did Bitcoin, seen as a gauge of risk sentiment.

“Record highs and a low VIX signals markets have already priced in perfection — a soft landing and a clean unwind of tariff risks — which feels wildly out of sync with the real-world picture,” said Hebe Chen, an analyst at Vantage Markets in Sydney. “A pullback is very much on the table, with the S&P 500 glued to overbought territory,” she said.

JPMorgan Chase & Co. chief executive officer Jamie Dimon is among those voicing concerns. Markets are too complacent about the threats caused by rising trade frictions, he said Thursday.

Trump’s latest comments cap a week of tariff announcements ranging from an unexpected 50% on Brazil — a country that received the benchmark 10% rate on April 2 “Liberation Day” and runs a trade deficit with the US — to 35% on some Canadian goods.  

‘Too Sanguine’

“We should anticipate larger tariff threats against other countries in the coming weeks,” said Michael Pearce, lead US economist for Oxford Economics. “The key question is the degree to which the administration follows through on the threats. Either way, financial markets appear too sanguine in my view on the downside risks from escalating tariffs.”

Trump posted this week about the record highs in US equities. “Tech Stocks, Industrial Stocks, & NASDAQ, HIT ALL-TIME, RECORD HIGHS!” he wrote. “USA is taking in Hundreds of Billions of Dollars in Tariffs. COUNTRY IS NOW “BACK.” A GREAT CREDIT!”

Markets may be getting “tariff fatigue” and opting to stay out of major trades until some final news on tariffs, according to David Chao, a global market strategist at Invesco Asset Management. “There’s just been so much policy overload, with constant updates, delays and new announcements that is creating a confusing environment.”

‘FAFO’ Trade

Continued market gains may inadvertently greenlight harsher US tariffs as Trump has historically looked to financial barometers as a measure of policy success. By contrast, declines could force the administration to pull back, as Trump did after his April 2 levies spurred the rare combination of a weakening US dollar, a selloff in Treasuries and a stock market slide. 

At a conference in Idaho on Wednesday dubbed “the summer camp for billionaires,” US Treasury Secretary Scott Bessent objected to the notion of a so-called TACO trade, an acronym coined by a Financial Times columnist that stands for “Trump Always Chickens Out” in the face of market losses, according to one person in the room. Instead, he said Trump’s strategy is more akin to FAFO, an acronym popular on social media that stands for “F—- Around and Find Out,” the person said.

“With US equities at record highs, the Trump administration has been emboldened to re-intensify tariff threats,” said Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken. “Higher tariffs may trigger a fresh round of US equity declines, which may prompt Trump to pull back yet again.”

For now, the economic blow some feared at the start of the year has yet to materialize. Inflation in the US remains contained, and export figures from Asia have been propped up by a rush of shipments to beat the looming tariffs.

A surge in Southeast Asia’s exports amid frontloading is due for payback, threatening a hit to gross domestic product growth rates in the second half of the year. Meanwhile, the weaker demand and higher cost of imported goods into the US have compelled companies abroad to cut costs, risking investment and future hiring. 

Despite Trump’s latest tariff salvos, there’s still a question over whether they’ll be implemented or are just another threat to squeeze concessions from countries. 

“The back and forth with tariffs is designed to accelerate the deals and ensure that Trump can claim victories along the way,” said Marko Papic, chief strategist of GeoMacro at BCA Research. “As such, investors should not try to trade every single tweet or decision.” 

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