Tariffs, what tariffs? Markets waver, as Trump’s tariff threats fail to dent market sentiment

Global stock markets brushed off tariff fears on Monday, however, as 25% levies on imports of steel and aluminum came into force late Monday night, which included steel and aluminum finished products, futures markets started to decline, and the S&P 500 along with the Eurostoxx 50 index are expected to open lower today as a tone of caution impacts financial markets.

Markets deal with trade uncertainty

President Trump’s tariff policy remains unclear, and thus, difficult to price in by financial markets. Trump said on Monday that tariffs on metals could go higher, and other tariffs could be announced later this week. At this stage, traders have little clarity about how far Trump’s tariff policies will go, whether they are mostly a negotiating tactic or if they will have a more long-lasting economic impact. It is also unclear if it will spark a wave of protectionism.

Are markets too complacent?

For now, risk assets seem comfortable with Trump’s tariffs, but are they being too complacent? The Vix volatility index fell to 15.81 on Monday, which is below the 12-month average of 15.92. This is a clear sign  that investors have some ‘tariff fatigue’ and it may take another driver, such as inflation concerns, to move the dial for equity markets. While volatility remains low, this could help stocks to grind higher. Interestingly, the 50 largest stocks in the US have seen their implied correlations fall, even as tariff threats continue to cast a shadow over the global economic outlook. This means that the biggest US firms are not moving in unison. When one stocks falls, it does not drag the rest of the big hitters with it. This is good news, especially when there are so many economic unknowns that investors must balance in their minds at once.

Price action at the start of the week was like a ‘buy everything’ rally. The US stock market rally was led by tech, there were also gains for mid and small cap US stocks. Bond markets rallied and the dollar gave back some recent gains at the start of this week. There were also broad-based gains for equities, and the gold price reached a fresh record. But can this continue on Tuesday?

BP beats estimates but has bad news on buybacks

The focus today could shift to corporate news, economic data and monetary policy on Tuesday. A consortium led by Elon Musk to buy OpenAI  for $100bn has been rebuffed by Sam Altman. Gucci owner Kerring has reported weaker than expected results, which could knock Europe’s luxury houses. BP has released results, it reported better EBIT results vs expectations and the company has also stuck with its buyback plans to issue $1.75bn of buybacks, even though it said that it will review future buybacks and announce its future plans on Feb 26th. It is worth watching to see if this knocks sentiment towards BP after its big jump on Monday. The 7% increase in the share price came after Elliott, the activist investor, said that it was amassing a stake in the embattled oil major.  

Other news to digest includes MPC member Catherine Mann said that in the UK corporate pricing power is weakening. Federal Reserve Chairman Jerome Powell will testify to Congress this week, starting this afternoon at 1500 GMT. He is likely to receive a grilling from the Republicans on the Senate Banking Committee, who are likely to ask him why he is not cutting interest rates at a faster pace. It will be interesting to hear how Powell frames the fact that the Fed is in a tricky position, since the impact of the new President’s policies  is as yet unknown, which makes policy paralysis more likely in the coming months.

 The path to lower interest rates cleared a little on Monday, when the New York Fed’s 1-year inflation expectations reading for January remained steady at 3%. US CPI will be released on Wednesday, and this will be a big test for markets. Will inflation continue to moderate, after the shock decline in December’s reding? If yes, then this could add to the risk-on mood.

Tech stocks back in vogue

Elsewhere, in more good news for stock market bulls, US tech stocks are recovering after last week’s DeepSeek shock. Nvidia was higher by more than 2.8% on Monday and is up 14% in the last 5 trading sessions. Hedge funds have been large net buyers of US equities, especially tech stocks. Big money is betting that tech will resume its leadership of the US stock market, which is another sign that stocks could remain resilient to Trump’s tariff threats, and the US’s new stance on trade policy will not have a negative effect on inflation or global growth.

While stock market volatility is falling, FX market volatility remains elevated. The JP Morgan G10 FX volatility gauge has risen sharply since Trump’s inauguration. If you are looking for a pure play on Trump’s tariffs fears, then FX is the way to go. For now, the dollar is moving sideways, as the pace of dollar gains slows. Interestingly, tariff fears are being expressed in the FX market as a lower euro and pound, both are lower vs. the USD since the start of January. While the JPY, CAD, NZD and AUD are all higher vs. the USD so far this year. This is also an expression of relief that Canada’s tariff threats have been shelved for now, and that tariffs on China are considered moderate, which is benefitting the NZD and AUD. Bitcoin also recovered on Monday, and is extending gains on Tuesday, in another sign that crypto is moving closely with US tech stocks.