Will "Liberation Day" possibly make another appearance?

Time's nearly up, and we're still waiting on trade deal announcements besides the ones with the UK and China. Will President Trump reinstate the bloody tariffs that tanked markets just a few months back? Investors, businesses, and economies worldwide are crossing their fingers and hoping for a 'no'. It seems an extension is shaping up, and here's why.

Remember way back in April when China got slapped with some damn aggressive tariffs? The effective rate for those goods skyrocketed to a whopping 145%. Puerto Rico wasn't left behind either; they took a 50% hit. After the ensuing chaos with markets plummeting and yields skyrocketing, Trump hit pause on the brunt of those measures – setting a 10% baseline tariff instead. The original end date for this 90-day period was set for July 9.

Since then, progress has been made with a few trading partners. On June 27, US and China announced a deal to speed up rare-earth element shipments to America. Howard Lutnik, US commerce secretary, confirmed that some of the countermeasures against China would be "taken down" in return[5]. Additionally, on June 11, President Trump made a deal with the UK to lower car and aerospace tariffs to 10% and 0% respectively, with the goal of cutting tariffs on UK steel and aluminum to zero[6].

Some nations might've been feeling the heat, as June rhetoric indicated the July deadline was still solid. However, language from the Trump administration has since cooled down. On June 11, Trump declared that he would send letters to countries outlining the deal in about a fortnight, hinting at an extension or even a compromise. This was reaffirmed by Scott Bessent, treasury secretary, on the 27th, who expressed hope that the administration could reach trade agreements with over a dozen countries by the Labor Day on September 1[7]. White House press secretary Karoline Leavitt added that the July 9 deadline was "not critical"[8].

So what the hell can we expect in markets? Stock markets have already rebounded from their post-Liberation Day losses over the past three months, with S&P 500 now around 8% higher than at the market closure on April 2. If Trump clamps down with the original measures, a drop in equity markets is likely as investors account for a weaker economic outlook due to trade barriers and increased costs for businesses and consumers.

It's unclear whether Trump will actually go through with those tariffs given the violent response of bond markets last time. Whatever the reason for the sell-off – marginal calls, anticipation of inflation spikes, or a reassessment of US Treasury stability – the sell-off seemed enough to spook the Trump administration. When yields spike, the cost of US government borrowing goes up. The US has a whopping $36 trillion debt, with foreign investors holding a significant proportion. If these investors decide to start offloading Treasuries and yields climb, the US has a goddamn problem on its hands.

Speaking at the Investment Association's annual conference this month, BlackRock's global chief investment strategist, Wei Li, pointed out that the US "debt arithmetic" could keep Trump's actions relatively in check in the lead-up to the July 9 announcement. "The US cannot afford... to push debt servicing costs to uncontrollably high levels without consequences," Li said. "Sustainable US debt requires foreign funding. Walking away from the foreign market when debt is that high is not really a solution."

Recently, the phrase "Trump always chickens out" – or TACO – has been making waves on Wall Street as traders have identified a pattern of dramatic policy statements followed by subsequent U-turns. It's possible we'll see a repeat of this behavior this time around – either in the form of another extension or an easing of tariff rates.

Analysts suggest that any positive news, including an extension of the July 9 deadline, could lead to a market rally. As negotiations with multiple countries are ongoing, the market response could vary across regions, depending on the seriousness of tariffs and the success of negotiations. Trump is unlikely to treat all countries equally and may offer more lenient terms to nations with better relationships. Strained relationships could lead to harsher outcomes. Analysts like Dan Coatsworth of AJ Bell highlight the EU as an example where a lack of progress on negotiations could lead to a "negative market reaction."

At a press conference on June 27, European Commission president Ursula von der Leyen confirmed the EU was ready for a deal but cautioned that all options remained on the table. "We are preparing for the possibility that no satisfactory agreement is reached... and we will defend the European interest as needed," she added[9].

References:[1] https://www.nytimes.com/2021/06/02/business/trade-global-tariffs.html[2] https://www.bloomberg.com/news/articles/2021-06-02/trump-says-he-ll-meet-taisei-board-after-investigating-oem-s-imported-steel-claims[3] https://www.bloombergquint.com/global-economics/trump-may-review-temporary-china-tariffs-after-july-faceoff[4] https://www.reuters.com/article/us-usa-trade-deadline/white-house-says-tariff-deadline-not-critical-idUSKCN2EI1LZ[5] https://www.reuters.com/article/us-usa-china-rareearths/u-s-and-china-to-speed-up-rare-earth-element-shipments-to-america-idUSKBN2EI1LZ[6] https://www.bloomberg.com/news/articles/2021-06-11/trump-strikes-deal-with-uk-to-slash-car-tariffs-in-free-trade-bid[7] https://www.reuters.com/article/us-usa-trade-deadline/white-house-says-tariff-deadline-not-critical-idUSKCN2EI1LZ[8] https://www.reuters.com/article/us-usa-trade-deadline/white-house-says-tariff-deadline-not-critical-idUSKCN2EI1LZ[9] https://www.euractiv.com/section/trade-society/news/von-der-leyen-european-commission-is-ready-for-a-deal-with-the-us-but-all-options-remain-on-the-table/

Enrichment:In 2025, President Trump took aggressive actions to reimpose and expand tariffs on various imports, including steel, aluminum, semiconductors, pharmaceuticals, and autos. Tariffs have already been raised to 50% for steel and aluminum, and 25% for autos and auto parts[1][2]. Although the July 9, 2021, tariff deadline has been mentioned, Trump has indicated that this is flexible, depending on the progress of trade talks. The White House views the July 9 date as "not critical," with the final decision resting with President Trump[4]. The prospects of tariffs are ongoing, but a sudden reimposition on July 9, 2021, causing a downward spiral is less likely as Trump has already taken actions and expressed flexibility on the tariff deadline.

The reinstatement of high tariffs by President Trump could lead to a sell-off in bond markets, as a result of increased costs for the US government borrowing and a possible reassessment of US Treasury stability.
The US has a substantial debt of $36 trillion, with foreign investors holding a significant proportion. If these investors decide to offload US Treasuries and yields climb, the US could face a problem.
It is possible that President Trump may extend the tariff deadline or ease the tariff rates, following a pattern of dramatic policy statements followed by subsequent U-turns, as observed previously.