Deep dive into our market intelligence update from WAM Global (ASX: WGB) Lead Portfolio Manager, Catriona Burns.
- Trump’s tariff policy response looks relatively uniform, and so does the response function of investors to Trump across asset classes.
- Key question to resolve is whether we are seeing a fundamental regime shift in global trade and the US dollar hegemony, or merely a test of its robustness.
- High volatility presents exciting longer-term opportunities.
The Trump administration’s reciprocal tariff regime appears to be quite mechanical. For a given country, tariffs will be charged according to the greater of 10%, or half of that country’s trade surplus with the US expressed as a share of the value of what the US is importing from them. Rarely do we see such a significant policy change supported by such a mechanical approach to the details.
Trump’s tariff policy response function looks relatively uniform, and so does the response function of investors to Trump across asset classes. Taking a snapshot of returns versus risk across all US dollar-denominated investments, we find that apart from select commodities like gold, investors are almost uniformly selling the most volatile investments.
Chart 1: Trump’s reciprocal tariff formula
Sources: US Treasury
Chart 2: Investor’s response to Trump’s tariff uncertainty by investment
Sources: WAM, Bloomberg
Rarely do we see such extremes co-exist – uniformity in the way a global policy shock is applied, and uniformity in investor sentiment. The medium-term likelihood is that we start to see less uniformity.
On the trade front, we could see countries strike deals with the Trump administration to de-couple their tariffs from trade balances in a favourable way. Alternatively, we could see retaliation drive decoupling in a negative way. On the topic of market sentiment, we could see investors position for a more conciliatory approach to trade, allowing them to identify pockets of value that have been created by recent market turbulence, and permitting more dispersion in their response functions to different exposures. However, the key question they need to resolve is whether we are seeing a fundamental regime shift in global trade and the US dollar hegemony, or merely a test of its robustness. Related to this, investors need to decide whether tariffs will create permanent or transitory inflation, and whether the tariffs themselves are permanent or transitory. If the answer to one or both questions is transitory, investors can have more comfort that policy maker puts will be activated, whether from the Fed, US Treasury or the Trump administration.
Chart 3: US risk appetite is in panic or oversold territory
Sources: WAM, Bloomberg
Chart 4: Leading indicators point to medium-term recovery in sentiment off panic levels
Sources: WAM, Bloomberg
With equity volatility high, we could continue to see some large swings in the market near term. Taking a longer-term view, we note that global risk appetite is now in “panic” or oversold territory. Sentiment tends not to stay at these levels for very long. Indeed, our proprietary leading indicator based on various liquidity and asset allocation signals, points to medium-term recovery. High volatility presents exciting longer-term opportunities.
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