Economy

Financial markets have been roiled by US President Donald Trump’s announcement of tariffs on key trading partners, and investors are bracing for further volatility ahead.Here’s how they are trading Trump’s on-again, off-again trade war.Equities: ‘impossible to avoid risk’Wall Street has been working since before November’s presidential election on how it should position for tariffs. Investment banks have built baskets of stocks with the highest sensitivity to Trump’s plans — mostly exporters such as carmakers and consumer goods companies — which allow their clients to bet on the impact of a trade war across a range of stocks.That happened on Monday, with companies such as General Motors and Ford in the US and Volkswagen and BMW in Europe falling on the tariff news, before rallying when they were delayed.The UBS Trump Tariff Losers basket, which tracks the performance of US shares negatively exposed to import tariffs on trading partners and which includes stocks such as Gap and Harley-Davidson, fell 6.6 per cent over the course of Friday and Monday, wiping out its gain for the year.“The basket got walloped on Friday and was hit again [on Monday],” said Andrew Slimmon, managing director at Morgan Stanley Investment Management. “The market underestimated the will of the president to use tariffs as a negotiating mechanism.”Some investors appear to have been ready for the weekend’s escalation. According to a Goldman Sachs note, hedge funds have “increasingly shorted” — or bet against — its own basket of tariff-exposed names in Europe. This basket includes Mercedes-Benz and BMW, which are down 3.8 per cent and 2.9 per cent respectively since Trump revealed his tariff plans, and beverage companies such as Diageo, which is down 7.6 per cent.The long-short ratio — the balance of bets on rising and falling prices — of names in the Stoxx Europe Automobiles and Parts index has dropped to “multiyear lows”, driven by accelerated selling by hedge funds since December, according to the bank. Among hedge funds to be running bets against autos is London-based AKO Capital, which is short Daimler Truck, while Marshall Wace is short companies including BMW and Mercedes, data from Breakout Point shows. Marshall Wace declined to comment. AKO Capital did not respond to a request for comment. However, fund managers are also wary of being too bearish, given the market’s rapid reversal this week, the fact that the moves were less extreme than some had expected, and the fear of missing out on the long-running bull market.In response to the “confusing” situation, Drew Pettit, analyst at Citi, said it is better to hold a bit of “everything”: growth, cyclical and defensive stocks. “It is impossible to avoid risk [assets] now, so you just need to manage it.”The Vix index, a measure of expected volatility known as Wall Street’s “fear gauge”, rose on Monday. But, at 16, it remains below its long-term average, in a sign that, for now, investor nerves have not given way to panic.However, the so-called “Vvix” — which measures investor expectations of swings in the Vix — is trading above its long-term average, suggesting investors are still wary that volatility could surge.Short-term activity in the options market, meanwhile, has been frenzied, as traders try to hedge against or profit from the rapid market reversals, or second guess Trump’s next move.Trading in so-called zero-day options — contracts that expire the same day and which are used to bet on extremely short-term market moves — hit an all-time high of $1.4tn in notional value last Friday, according to data gathered by Rocky Fishman at Asym 500. Currencies: ‘incredibly difficult’The Canadian dollar fell to its lowest against the US dollar since 2003 on Monday, as investors bet on faster Bank of Canada rate cuts, with a record 386,000 futures contracts tied to the Canadian dollar being traded, according to CME Group. But it then recovered all of the day’s losses on news of the postponement of tariffs. The Mexican peso had a similar reversal.That has left traders in the currency market — often the first market to react to such news — similarly scratching their heads about how they should be positioned.“The big question is whether [Trump’s] got some master plan which involves taking things to the brink, or whether he’s just making it up as he goes along,” said Paul McNamara, investment director at GAM.“Trying to read that man’s mind is just . . . It’s just incredibly difficult. [You’re] trying to trade on something which could go either way.”For now, McNamara said his team was “a bit underweight” emerging market currencies and slightly long the dollar — “not to a sufficient extent to really rescue us, if we get maximum tariffs, but on the other hand it’s some protection” if Trump were to back down again at the last minute. “Our low conviction view is that things get worse,” he said.Currency options have been popular. Strategists at JPMorgan saw “sizeable demand” for dollar options against the Canadian dollar and Mexican peso on Monday, “as the risk of tariffs going into effect was too great for the market to ignore”.However, many investors are sticking with a bet on US dollar strength, the central “Trump trade” that has reshaped markets since the electoral odds began shifting in the Republican candidate’s favour last year.There was more demand on Monday for dollar “calls” — options giving bullish traders the right to buy the US currency at an agreed price — than “puts”, options giving traders the right to sell the dollar, according to JPMorgan. Some say currency markets are reacting in a more volatile and uncertain way than during Trump’s first term. “Event risk, particularly at weekends, has definitely grown,” said Gary Prince, managing director for financial markets at ING, exacerbated by uncertainty over the potential scale of tariffs. That has also fed into investors getting less attractive prices than they expected when they trade, Prince added, due to the rapid market moves.Some investors, meanwhile, are looking for currency pairs less exposed to tariff news. “I think we have learnt to have most of our risk in trades which are not hostage to headlines,” said Mark Dowding, chief investment officer for fixed income at RBC Bluebay Asset Management, which is betting on the yen against the euro.Bonds: ‘countervailing influences’Fixed income managers are trying to work out whether tariffs mean higher inflation and interest rates, or weaker economic growth, which could lead to more rate cuts.The immediate reaction on Monday was to price in more inflation and slower interest rate cuts in the US, with two-year Treasury yields rising above 4.28 per cent, although they have since fallen back.At the same time, investors bet on lower growth and faster interest rate cuts in countries such as Canada and the UK. “You do have countervailing influences,” said Mark Cabana, head of US rates strategy at Bank of America. “The way the rates market has initially traded that is to expect the Fed [to keep rates] on hold for longer, due to inflation risks, but then assign some increased probability of growth negative impacts” in future.For Cabana, it makes sense to buy Treasury inflation protected securities. “They implicitly give you a hedge to inflation and they also help you guard against some of the downside growth risks.” In emerging market debt, meanwhile, fund managers have been using sell-offs in some countries’ sovereign debt caused by tariff news as a buying opportunity.Such news “really results in healthy moves in asset pricing, where we can take the opportunity to get involved in names that, in our assessment, are strong fundamentally or mispriced”, said Alaa Bushehri, head of emerging markets debt at BNP Paribas Asset Management, which has recently bought Mexican debt on negative tariff headlines.Another fund manager, who asked not to be named, said they took advantage of the recent brief US tariff threats against Colombia to buy its debt at a lower price.Risk-on or risk-off?Some investors are turning to other assets as they search for havens. Gold this week hit a fresh record high of $2,882 per troy ounce. “In the commodity world, the only trade you can really go to right now is gold,” said Panmure Liberum analyst Tom Price.But bitcoin, billed by some as “digital gold”, has offered less protection and is down this week, despite investors’ early expectations that Trump would prove supportive to the sector.Beyond the short-term trades, fund managers are nervous about longer-term bets on a major downtrend in risky assets that might never happen, particularly given how strongly markets have performed in recent years.Investors “just don’t know enough about Trump’s next move and how the Fed will react”, said Andrew Pease, chief investment strategist at Russell Investments. “Going underweight risk assets is a big call, and you need to be very confident. It’s hard to get back to neutral if the market doesn’t correct.”Additional reporting by Costas Mourselas More

Argentina’s libertarian President Javier Milei is promising to lift the country’s strict capital and currency controls this year, starting the clock on a high-risk mission that is essential to his revival of the troubled economy.The controls, which limit individuals’ and companies’ access to dollars and set an official exchange rate, have been in place for nine of the past 13 years. Foreign businesses say they are a huge hurdle to investment in Argentina, even as Milei’s free market reform drive piques their interest.Milei is seeking an IMF loan to help him lift the controls, but says he will do so by the end of this year regardless.“Even without the IMF’s help . . . the controls will no longer exist on 1 January 2026,” he told a local television station on Monday. “Now, [if there is a disbursement], we can do it faster. We’ll have to see how the program is structured.”Milei has a good reason to hesitate, economists say. Known collectively as “el cepo” (“the trap”), the controls are made up of half a dozen critical regulations and many smaller rules, which help to stabilise the peso and prevent capital flight from Argentina.Removing the wrong rule at the wrong time could unleash too much pent-up dollar demand, leaving Argentina’s cash-strapped central bank unable to respond, and force the government to devalue the peso’s official exchange rate. Or it could provoke volatility on the black and legal financial markets where Argentines buy dollars, because access to the official market is restricted.Either of these scenarios could reignite the inflation crisis that Milei has managed to tame with a severe austerity package. The monthly inflation rate has fallen from a peak of 26 per cent in December 2023 to below 3 per cent — the main factor sustaining Milei’s consistent 50 per cent approval rating, pollsters say.“Milei doesn’t want to risk cutting the wrong wire in this [bomb] that he is disarming, and blowing up his whole success story,” said Fabio Rodriguez, a director at M & R Asociados, a financial consultancy in Buenos Aires. “The problem is, we’ve had the controls for so long that we don’t know how many people will sell pesos when they are lifted, or where exactly the exchange rate should be,” he added.Argentina is due to hold midterm elections in October, where Milei’s La Libertad Avanza hopes to grow its tiny congressional minority. Analysts say Milei is unlikely to risk changes to the controls in the run-up to the polls, and authorities say they aim to reach an agreement with the IMF by April.Milei has said he needs $11bn to replenish central bank’s negligible hard currency reserves and bolster its firepower to prevent a potential run on the peso as controls ease.Argentina is already the fund’s largest debtor, still owing more than $40bn for its most recent programme, which concluded in December. An IMF delegation left Argentina last week after negotiations in which the main sticking point was Milei’s unorthodox exchange rate policy.The peso was allowed to weaken just 2 per cent a month in 2024, with the pace reduced to 1 per cent from this month. With inflation running well above that, the currency appreciated more than 40 per cent in real terms last year. Argentina has run a current account deficit since June and the central bank has struggled to build up reserves. But IMF officials, including managing director Kristalina Georgieva, have praised the rest of Milei’s policies, which in 2024 delivered Argentina’s first budget surplus in 14 years. That has fuelled growing expectations of a deal, particularly as the fund was willing to lend to Milei’s left-leaning predecessor, who printed billions of dollars’ worth of pesos to fund spending and failed to relax currency controls.Analysts and people familiar with talks said the deal could hinge on a phased lifting of controls, designed to carefully manage new dollar demand.“I would be very surprised if they decided to lend without a commitment on lifting controls, but they shouldn’t empty the whole spaghetti bowl in one go,” said Hector Torres, an Argentine former IMF director.Milei’s team has a lengthy menu of options to choose from. The government has already started to remove barriers for importers to send money overseas. Experts say some minor financial regulations, such as holding peso government bonds for a minimum of 24 hours, may be removed with limited fallout.Others regulations are harder to cut. A restriction that prevents multinational companies from transferring profits overseas, for example, is keeping some $10bn worth of pesos in Argentina that would be probably converted to dollars if the rule was scrapped, according to consultancy Fundación Capital.Central bank president Santiago Bausili said in November that such stockpiles were “the main impediment to lifting controls” and that the government was prioritising restrictions on future flows of money.One key regulation in the IMF’s crosshairs is the government’s regime for Argentina’s crucial agricultural exporters, who must convert 80 per cent of their dollar earnings with the central bank but can divert the remainder into a parallel market for a better exchange rate. That cost the central bank up to $12bn in potential reserve inflows last year.When and how IMF support arrives is unclear. While fund watchers say a deal looks increasingly close and that Milei’s $11bn figure is feasible, it’s unclear how much would be transferred upfront.Alejandro Werner, a former Western Hemisphere director at the IMF, wrote in a blog last week that disbursing large amounts upfront would allow Argentina to spend IMF resources on keeping the peso strong and deepening its current account deficit. That would “leave the country in a weaker financial position once the exchange rate correction happens”, he added.The “most likely outcome”, he argued, was for the fund to only offer financing to allow Argentina make $2.5bn in payments it has due to the fund itself in 2025, relieving the stress on its scarce cash resources, but wait until 2026 to provide “greater financial backing” to lift controls. In that scenario, the government would lift only minor parts of the controls until elections, while focusing its economic policy on securing enough dollars to sustain the exchange rate and control market jitters.“They will do whatever it takes to maintain stability until the elections and then their options start to open up,” said Amilcar Collante, an economist at Argentine consultancy Profit Consultores. “Until then, they’re putting the economy in cruise control.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.It would reach Himalayan heights of foolishness for Canada, China and Mexico to assume they’ve seen the last of Donald Trump raising tariffs. This week their governments all coped with the threat rather well. To forestall the threat of 25 per cent import taxes, Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau executed what I call the “soyabean shuffle”. The term recalls the then European Commission president Jean-Claude Juncker forestalling car tariffs in 2018 by promising Trump that Europe would buy more US soyabeans, which it already was. Mexico and Canada this week announced the deployment of troops and border staff who were largely there already to combat the flow — minimal in Canada’s case — across the border of the opioid fentanyl. China imposed modest rises in energy tariffs, more clampdowns on exports of critical minerals (which have never really worked) and a vaguely worded investigation into Google.But Trump will come back for more, and broaden his targets to include the EU and middle-income economies aside from China. He has a particular animus against Vietnam, which he correctly views as a supply chain stop-off and offshore production platform for China. Exporters cut out of the US must find new markets.I’ve argued that the threat of US tariffs against China diverting Chinese exports into those countries and worsening “China Shock 2.0” can be overdone. Trump’s first term showed emerging economies taking China’s share of the US import market.But the US trying to reduce overall imports will be seriously destructive to foreign exporters and to itself. This week’s elimination of the $800 “de minimis” customs-free allowance for China will clobber Chinese ecommerce companies such as Temu and Shein. Yet Trump is also contemplating imposing tariffs and ending those de minimis exemptions for other countries.Trade between middle-income economies is becoming increasingly important. The consultancy BCG projects goods trade between China and other emerging economies rising by an annual growth rate of nearly 6 per cent in real terms between 2023 and 2033. Growth in trade between the high-income countries and China will barely be positive.Some content could not load. Check your internet connection or browser settings.But some of that just reflects adding extra stages to the value networks delivering goods to the US. High-income economies are not being cut out of the picture. Trade between middle-income countries excluding China will rise by 3.8 per cent and between those middle-income and rich countries by 3.7 per cent.Certainly, the world can adjust. Growth models can change. But the voracious American consumer will be hard to replace quickly. Currently, as trade has recovered from the initial shock of the Ukraine war, US imports have increased far faster than the world as a whole, while Chinese import growth has fallen. As David Lubin of the Chatham House think-tank in London (habitual disclaimer: I’m an unpaid associate fellow there) puts it, exporters find themselves caught in a battle of mercantilisms, with both China and the US seeking to increase exports relative to imports.China’s economic travails, with domestic demand weak after the bursting of the property bubble, has pushed Beijing and regional governments back towards their familiar export-led model. In terms of volume, Chinese exports rose at an annual rate of 13 per cent in the third quarter of last year, far faster than world import growth at less than 1.5 per cent. Lubin bluntly calls this a “predatory” trade policy, aiming to capture market share from other countries. He says the simultaneous drive to reduce imports has a geopolitical end, “to make China less dependent on the rest of the world and the rest of the world more dependent on China”.In the past couple of years there has been a wave of antidumping and other emergency tariffs in developing economies to protect their companies from Chinese competition. So far they have concentrated on industrial inputs such as steel — politically high-profile but not a huge part of global value-added in trade. But if US demand is choked off, the pressure to broaden them will increase.As for other sources of final demand, emerging economies themselves, particularly in Asia, have been consuming more as they get richer. But east Asian countries are typically net exporters: Malaysia, Singapore, Thailand and the Philippines have generally run current account surpluses since the Asian financial crisis in 1997-98, as have South Korea and Japan. Meanwhile, the EU, struggling to raise growth while Germany remains obsessed with exports, is also unlikely to pick up the consumption baton.This may add up to trouble ahead for countries exporting to the US, especially heavily exposed economies like Canada and Mexico. Trump’s economic policies will encourage a wider US trade deficit, the opposite of what he wants. His planned sweeping tax cuts will increase consumer demand and suck in imports. His tariffs will make US exporters less competitive by strengthening the dollar, which import taxes tend to do.It will not be pretty if Trump starts deploying tariffs all round to stop the US being a consumer of last resort while implementing policies that will ensure it remains so. Exporters will be hunting round the world for scarce demand. As I’ve said before, the real threat to the global economy is not the rejigging of supply chains. It’s the danger that the most reliable market for global exports decides to crunch economic growth to get its trade deficit down and there’s not enough demand elsewhere to replace it.alan.beattie@ft.com More

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Unlock the White House Watch newsletter for freeYour guide to what the 2024 US election means for Washington and the worldThe Japanese owner of Jim Beam and Maker’s Mark bourbon whiskies expects that some global consumers will boycott its American brands as part of a backlash against Donald Trump’s protectionist trade policies.Takeshi Niinami, chief executive of drinks giant Suntory Holdings, said it was planning on the assumption that its US brands would be “less accepted” because of the threat of tariffs and the “emotion” of consumers in major markets, including Europe. “We laid out the strategic and budget plan for 2025 expecting that American products, including American whiskey, will be less accepted by those countries outside of the US because of first, tariffs and, second, emotion,” he told the Financial Times in an interview.“Our plan is less export from the US to other countries like [in] Europe, Mexico and Canada.” He added: “We have to be more focused on the US to sell American whiskey.”The comments highlight how major corporations are adjusting to the combative trade policies of the Trump administration, as they seek ways to create stability and navigate an unpredictable White House.Suntory Holdings chief Takeshi Niinami: ‘If tariffs go to every corner of the world, then the US will be hurt the most’ More

In recent days, multiple central bank policymakers not only have noted the uncertainty surrounding tariffs, they also have highlighted the potential impact on inflation.
Chicago Fed President Austan Goolsbee cited a number of supply chain threats that include “large tariffs and the potential for an escalating trade war.”
Economists generally see tariffs as having one-time impacts on prices. However, in this case President Donald Trump is casting a wide enough net that it could generate the kind of underlying inflation the Fed fears.

Austan Goolsbee speaking at Jackson Hole on August 23, 2024.
David A. Grogan | CNBC

Federal Reserve officials take great pains not to comment on fiscal policy, but the looming threat from tariffs is forcing their hand.
In recent days, multiple central bank policymakers not only have noted the uncertainty surrounding President Donald Trump’s desire to slap broad-ranging duties on products from Canada, Mexico and China — and perhaps the European Union — they also have highlighted the potential impact on inflation.

Any indication that the tariffs are presenting longer-lasting pressure in prices could make the Fed hold interest rates higher for longer.
In remarks at an auto symposium Wednesday in Detroit, Chicago Fed President Austan Goolsbee cited a number of supply chain threats that include “large tariffs and the potential for an escalating trade war.”
“If we see inflation rising or progress stalling in 2025, the Fed will be in the difficult position of trying to figure out if the inflation is coming from overheating or if it’s coming from tariffs,” Goolsbee said. “That distinction will be critical for deciding when or even if the Fed should act.”
On Jan. 29, the Federal Open Market Committee, of which Goolsbee is a voting member, voted to hold its benchmark interest rate steady at a range of 4.25% to 4.50% as it evaluates the evolving set of economic conditions.
The vote came amid a backdrop of gamesmanship between Trump and its largest U.S. trading partners, in which he postponed levies against Canada and Mexico but added 10% in tariffs against China, which retaliated with its own measures.

Economists generally see tariffs as having one-time impacts on prices, affecting particular goods where the duties are targeted but not acting as more widespread and more fundamental drivers of inflation. However, in this case Trump is casting a wide enough net that it could generate the kind of underlying inflation the Fed fears.
A limited road map
In an interview Monday with CNBC, Boston Fed President Susan Collins, also an FOMC voter, said she and her staff are studying the potential impact of tariffs, and she noted the unusual nature of the sweeping tariffs Trump has proposed.
“We have limited experience of such large and very broad-based tariffs,” she said. “There are many different dimensions, and there are second-round effects as well, which make it particularly hard to really assess what the amounts would be … We don’t know what the time frame would be that would cause a rise in a price level.”
If the tariffs were short-lived, “you’d expect the Federal Reserve would try to look through,” she said. “But of course, there are many factors going on from that perspective. So I’ll just say quickly that the underlying trends in inflation in the economy really matter a lot for how, you know, how I think about policy going forward.”
Other Fed officials, such as Philadelphia President Patrick Harker and the Atlanta Fed’s Raphael Bostic, also said they are concerned about potential inflationary effects and said they also will be watching for longer-term impacts.
For his part, Chair Jerome Powell deflected multiple questions about tariffs at his post-meeting news conference last week, saying it’s too early to make judgments about fiscal policy.
“We don’t know what will happen with tariffs, with immigration, with fiscal policy, and with regulatory policy,” he said. “I think we need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be.”
— Reuters contributed to this report. More

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