Global markets took a sharp turn downward last week following the unexpected announcement of sweeping ‘reciprocal tariffs’ by US President Trump. Investors are now pricing in a real risk of a US recession—unless Trump backs down or the Federal Reserve intervenes soon.
Global markets last week...
The pre-COVID era’s so-called “great moderation” is long gone. In its place, investors have faced a rollercoaster: the COVID crash, a V-shaped rebound, surging 1970s-style inflation, and then a seemingly miraculous soft landing—marked by cooling inflation and robust employment.
And just as 2025 appeared poised to extend the Goldilocks scenario, Trump unveiled what could be the most economically damaging US policy decision since WWII. The new tariffs represent an extraordinary escalation, lifting the average effective US tariff rate from 3% to 23%. The methodology behind the tariffs has faced broad criticism, penalizing countries regardless of their actual trade barriers.
Despite US warnings, retaliation seems inevitable. China has already responded with a 34% tariff hike on US imports. The EU is expected to announce countermeasures soon, likely focusing on US service exports and tech giants—both areas where Europe has strategic leverage.
Outlook: Buckle-up...
Unfortunately, things may worsen before they improve. A near-recession scenario for the US is now a base case unless policy shifts. Why the gloom?
Higher Tariffs = Higher Taxes: These are effectively a tax on US consumers and businesses, dampening spending and sentiment.
Supply Chain Disruption: The price shock across global supply chains creates uncertainty, which tends to delay investment and hiring.
Global Retaliation: US exporters are already facing blowback abroad.
Inflation Risk: Short-term inflation could rise by 1–2%, potentially delaying any Fed support unless activity sharply deteriorates.
While Trump might pivot to tax cuts, his proposed household income tax relief largely just extends temporary measures already in place. Corporate tax cuts may offer new stimulus but won’t offset the damage from his tariff strategy.
As for US manufacturing, any potential gains from reduced import competition would take years to materialize—if ever. Many inputs will become more expensive, and US labor remains costly. Moreover, companies won’t invest on the basis of trade policy that could be reversed with the next election.
Bottom line: equity markets likely haven’t hit bottom—unless Trump walks back his approach. And even then, further volatility may be needed before he’s willing to change course.
Australia...
Local markets fell sharply this morning, by about 6.5%, in line with the global trend, but then regained some lost ground later in the day, finishing down 4.23% (Australia has fared better than many others).
US futures are pointing down a little.
The Australian dollar has also been hit hard temporarily falling below 60cbefore slightly recovering - the AUD is seen as a bellwether for global growth and Chinese demand.
The RBA held rates steady at its April meeting, as expected. However, recent developments strengthen the case for a rate cut in May. Depending on our inflation readings, there is a good chance that the RBA will cut by up to 0.35%, lowering the cash rate to 3.75%.
In summary...
From their February record highs US shares are now down 17%, global shares are down 16% and Australian shares are down 15%. As most of us have at least some wealth in shares via superannuation, such falls can be depressing, but seen in the context of share market history, which often sees periodic sharp falls, this setback is nothing new. So far, while the fall in US shares has been rapid, the total drop is mild when compared to the last 120 years...
More to come...
Rick Maggi, Financial Advisor (Perth)