Why are investors choosing to turn a blind eye as the deadline for tariffs approaches?

The market believes that the deadline has enough "flexibility" and thinks that the worst-case scenario is no longer being considered. If April 2 is the earthquake, then the tariff letter is just an aftershock; even if the tax rate is higher than the earlier 10%, the impact on the market will not be the same.

Written by: Xu Chao

Source: Wall Street Journal

Global investors are迎接特朗普关税大限 with a numb and calm attitude, and multiple mild scenarios have been fully digested by the market.

According to the Global Times, U.S. President Trump stated that the U.S. government will notify countries that have not reached trade agreements of new tariff rates starting July 4, with rates ranging from 10% to 70%, and plans to officially implement this from August 1. This upper limit on the tariff rate (70%) is much higher than the 50% announced in April.

The market's reaction to the tariff news has become more composed. Jeff Blazek, Co-Chief Investment Officer of Multi-Asset at Neuberger Berman in New York, stated that the market believes there is enough "flexibility" in the deadline and that the worst-case scenario is no longer in consideration.

Tariff levels and schedules continue to change

Tariff levels and effective dates have become uncertain factors. Trump stated last Friday that tariffs of up to 70% may take effect on August 1, far exceeding the 10%-50% range announced in April.

Currently, the U.S. government has only reached a limited agreement with the UK and a principled agreement with Vietnam. The expected agreements with India and Japan have not been realized, and negotiations with the EU have also encountered setbacks.

According to Xinhua News, European Commission President Ursula von der Leyen stated that the EU aims to reach an agreement by July 9. Regarding tariffs, "we are ready to reach a principled agreement with the United States." However, if negotiations fail, the EU will firmly take countermeasures to protect the European economy.

According to Global Network reports, Japanese Prime Minister Shigeru Ishiba has stated that he will not "easily compromise" in tariff negotiations with the United States. Japan is prepared for all possible scenarios regarding tariffs and is ready to "firmly" defend its own interests while anticipating various possible outcomes.

Rong Ren Goh, portfolio manager of the fixed income team at Eastspring Investments in Singapore, stated that if April 2nd was an earthquake, then the tariff letter is just an aftershock. Even if the tax rate is higher than the earlier 10%, the impact on the market will not be the same. He pointed out that there is an excess of liquidity in the financial system, and the painful experience in April reminds investors that after a risk-off sell-off, they may face the risk of being forced to chase prices again.

The dollar is under pressure, interest rate expectations are adjusted

Investor attention has also been diverted by weeks of congressional debate over Trump's massive tax and spending plan, which was signed into law on Friday.

The stock market celebrates the passage of a bill that makes Trump's 2017 tax cuts permanent. However, bond investors are concerned that the related measures could add more than $3 trillion to the United States' $36.2 trillion debt.

Inflation risks related to tariffs are putting pressure on U.S. Treasuries and the dollar, impacting expectations for Federal Reserve policy. Interest rate futures show that traders no longer expect a rate cut this month, with only two 25 basis point cuts anticipated before the end of the year.

The safe-haven status of the US dollar has been impacted by the fluctuating tariff policies. The dollar index has performed the worst since 1973 in the first half of this year, dropping about 11%, and has declined 6.6% since April 2.

John Pantekidis, Chief Investment Officer of TwinFocus in Boston, stated that the market is digesting expectations for a return to tariff levels of 35%, 40%, or higher, and anticipates an overall tariff of around 10%. He remains cautiously optimistic about the outlook for U.S. stocks but is closely monitoring changes in interest rates.