Tariff Man impacts stock market as inflation decreases, potentially leading to more interest rate cuts during election season despite disappointing earnings reports.
Global markets experienced a downturn due to rising concerns regarding economic stability caused by factors like trade tensions, weakened data, and the policies implemented by President Trump that have sparked unease among investors and increased risks of market corrections. This sentiment was echoed by Dr. Shane Oliver, Head of Investment Strategy & Chief Economist at AMP, who analyzed the recent developments in investment markets, various economic events globally and in Australia, and economic activity indicators.
The past week saw a decline in global stock markets due to worries about the economic outlook, exacerbated by poor data from the US, the introduction of new tariffs by President Trump, and fears that the Artificial Intelligence (AI) boom may be coming to an end. US shares tumbled by approximately 4.6% from their recent highs, while Australian shares were set to drop by 1.6% for the week, influenced by US tariffs and disappointing profit reports. This decline affected sectors like IT, mining, property, and retail shares. Bond yields decreased on concerns about economic growth, while prices of oil, metal, and iron ore remained relatively stable, with gold prices falling. The fall in US shares also led to a decrease in Bitcoin prices. The ongoing discussion about tariffs coupled with worries about global economic growth resulted in an appreciation of the US dollar and a depreciation of the Australian dollar, potentially signaling a retest of its February lows.
Despite the market volatility, the expectation of positive but restricted returns in share markets this year persist as central banks, including the Reserve Bank of Australia (RBA), continue to lower interest rates to stimulate growth. This positive outlook is also supported by the belief that President Trump’s disruptive policies are counterbalanced by his administration’s desire to see the share market flourish, particularly through favorable policies like tax cuts, reduced government intervention, and deregulation. However, concerns remain regarding the possibility of a significant correction of 15% or more due to stretched valuations and the potential impact of Trump’s more negative policies on trade and government spending. The risks associated with these policies continue to rise given the current administration’s approach, which seems to lack the moderating influence of more experienced advisors present during Trump’s earlier years in office.
Trump’s recent decisions, such as the introduction of multiple tariffs on various countries and products, the proposal to establish an External Revenue Service to collect tariffs instead of income tax, claims that the world owes the US for security, implementation of cutbacks in public services, and controversial stances on international affairs have contributed to increasing uncertainty among businesses and consumers. These measures have also impacted the US economy, evident in declining consumer confidence, deteriorating business conditions, and rising inflation expectations, which are now at their highest in nearly three decades. The Federal Reserve may face challenges in managing inflation and its economic implications in response to these developments.
