Reasons why markets fell on Trump’s tariff plan and what could happen next

Financial markets fell around the world in response to Donald Trump’s so-called “Liberation Day” on 2 April where he imposed sweeping tariffs on countries that sell goods to the US. The tariffs range from 10% (as seen in the UK) to as high as 50%.

Markets were already weak in the run-up to Trump’s announcement in anticipation of new tariffs, yet it was the scale and severity of the levies that shocked investors following the US president’s speech. It sets the tone for a global trade war.

Why did financial markets fall?

Investors are worried that tariffs will dampen economic growth around the world. Share prices fell as markets priced in the prospect of tariff-recipient countries retaliating, weaker corporate earnings and lower investor risk appetite.

Tariffs are a tax paid by the buyer of imported goods. In the situation of the US, Trump believes the latest round of tariffs will create additional income for the US government.

Tariffs make imported goods more expensive so buyers potentially seek alternative sources. Trump is gambling on American companies and consumers buying more locally produced goods and services as result of the tariffs.

Critics say this strategy will push up costs for the end user regardless of which route American companies or consumers take.

Imported goods become more expensive, while domestically produced goods or services could also be more expensive because labour and raw material costs could be higher versus items previously sourced from foreign countries.

All this implies that the cost of living could go up again.

What does this mean for interest rates?

Higher rates of inflation can have a negative impact on the valuation of financial assets. They might also lead to a pause in the rate cutting cycle for central banks.

The likes of the Bank of England and Federal Reserve typically put up interest rates when inflation is trending well above a 2% target so as to slow down the economy. As inflation heads back towards target, they cut rates to encourage more spending.

We now face the prospect of a global economic slowdown – normally that would encourage interest rate cuts, but rising inflation traditionally leads to rates staying the same or going up. It leaves central banks in a quandary.

Canada recently cut interest rates to help its economy in anticipation of a hit from US tariffs. We might see other countries do the same, potentially getting in quick before tariffs work their work into the system. However, certain central banks such as the Federal Reserve let data guide their decisions, and they might want to see how tariffs play out before making changes to rates. This creates further uncertainty for markets.

How did financial markets perform immediately after Liberation Day?

Stock markets fell around the world. Notably, the US and Asia fared worse than Europe. The US dollar index weakened, being a measure of the value of the US currency relative to a basket of foreign currencies.

Oil dropped approximately 4% as markets worried about tariffs depressing economic activity and that situation leading to weaker energy demand. Even gold couldn’t get a break which is surprising given investors have traditionally viewed the precious metal as a safe-haven asset that holds its value during times of market strife.

Who were the biggest losers on the stock market?

Standard Chartered, HSBC and Barclays were among the biggest fallers on the UK stock market. Trump’s tariffs are particularly punishing for various parts of Asia and that puts HSBC and Standard Chartered in the firing line given their major reliance on that part of the world.

Tariffs will spook businesses and that could lead to reduced investment, which in turns suggests less demand to borrow from banks or for advisory services on M&A activity. The same applies to Europe and the US which are key places where Barclays does business.

Vietnam-related investment trusts slumped on the London market after Trump imposed a 46% tariff on goods coming from the Asian country into the US. That’s problematic for firms which have shifted manufacturing from China to Vietnam in recent years.

The US stock market includes potential losers from Trump’s tariffs including consumer-facing companies that import goods into America. Shoe seller Nike, discount store operator Five Below and fashion retailer Gap were among the worst performing shares following the Liberation Day announcement.

Were there any winners on the stock market?

Companies with defensive qualities were on investors’ shopping lists – namely businesses whose demand should not fluctuate with changes to economic conditions. For example, consumers and businesses need the services of utilities and tobacco is highly addictive.

Energy transmission specialist National Grid, headache tablet seller Haleon and cigarette/vape maker British American Tobacco were among the biggest risers on the UK stock market – all defensive names.

The pharmaceutical sector cheered with joy as their products were exempt from Trump’s new tariffs. GSK and AstraZeneca were among the rare risers on the FTSE 100 as they clawed back recent share price losses and also fell under the category of defensive stocks.

What might happen next?

The Trump administration is likely to spend the next few days and weeks locked in talks with various governments around the world. Trump will push for deals, such as access to natural resources or lower taxes/levies on US companies, in exchange for lowering tariffs on the respective countries.

Certain governments may not want to do deals, which means we could see heightened geopolitical tensions in the run-up to summer.

Investors should expect markets to stay volatile during the negotiation period.

Golden rules for investing during volatile markets

It is important to stay calm and not make knee-jerk reactions to your portfolio every time markets have a bad day.

If you look back over history, it is common to see markets go through bad patches. Investing requires patience so you can ride out any bumps in the road.

We don’t know when markets will recover, but the bounce-back can often be rapid. It can pay to stay invested so you don’t miss the recovery if it comes.

Certain investors contribute a set amount of money each month into their ISA or pension. When markets fall, as we’ve just seen, their money will buy more shares or fund units as they’ve become cheaper. When markets are doing well, their money buys fewer shares or fund units. Over time, this should average out.

Having a diversified portfolio can help to spread risks around a range of investments so you are not overly reliant on one or a handful of stocks, funds or bonds.

While major stock market indices fell after Liberation Day, certain individual investments went up in value, which is encouraging.