Solomon Macro: Tariff War 2.0 (3 April 2024)

Top Headlines

• Asian markets and U.S. futures tumbled Thursday following U.S. President Donald Trump’s announcement of big increases in tariffs on imports of goods from around the world.

• Tokyo’s Nikkei 225 index initially dipped more than 4%, but recovered slightly. It was down 2.9% at 34,675.97.

• Trump said he was imposing a 24% “reciprocal tariff” on Japan, one of the United States’ closest allies.

• South Korea, also an ally, was hit with a 25% tariff. Its benchmark Kospi slumped 1.5% to 2,468.97.

• Hong Kong’s Hang Seng lost 1.4% to 22,887.03, while the Shanghai Composite index edged less than 0.1% lower, to 3,348.67, as market expects stimulus plans by Beijing.

Tariff Announcements Worse Than Expected

• Baseline 10% tariff on all countries starting 5th Apr

• Higher rates for specific regions starting 9th Apr, such as 34% on China, 26% on India, 25% on South Korea, 24% on Japan, 20% on EU

• Steel, aluminium, copper and gold excludes from reciprocal tariffs

• Cumulative US tariffs on Chinese goods 54%

Effective tariff rate ~18%, leaning towards the risk case scenario and exceeding the 15% level previously discussed by economists.

Market Reactions thus far

• S&P futures trading down -3%

• Bond futures moved higher

• Broad dollar index DXY fell to 103

• USDCNH rallied to 7.31 level (CNH weakened to 2M low)

• Gold up again to above 3,150

Impacts to Broader Picture

This will hit GDP growth, push inflation higher, and keep pressure on the US stock market. Uncertainty has not been tamed. Looking at a very challenging day for the US stock market on 3/4/2025 (implied S&P500 down ~4% session).

• Recession probability raised to 35% from 20%, from lower growth baseline, deterioration in household/business confidence, and White House’s willingness to tolerate near-term econ weakness in pursuit of policies

• Rate cuts: pulled 1x 2026 cut into 2025, now expecting 3x cuts in Jul/Sep/Dec

• Downsize risks to econ from tariffs increased likelihood of 2019-style ‘insurance cuts’

• Cut SPX 3/12month forecast to 5300/5900 (vs 5600/6500 old)

• Historical equity recession playbook implied 25% SPX drawdown from recent peak, would equate ~17% drawdown to trough level of ~4600 if followed

• It would represent 17x fPE at that level, last 3 downturns bottomed at 15x/13x/14x for 2022/2020/2018

Individual stocks will remain opportunistic once the dust settles as disruption caused to supply chain globally. In the meantime AI, defense, gold related stocks will continue to be favoured. We believe the yen and yen denominated stocks will benefit a possible hedge against a possible recession in the US. HK will benefit from the stimulus released by China.