Investors keep liquidating ‘safe haven’ assets as China, EU retaliate against US
(Originally published April 8 in “What in the World“) After China’s 34% retaliatory tariff on U.S. imports, the European Commission is planning its own 25% tariff.
China chose a tariff identical to the new “reciprocal” tariff announced by U.S. President Donald Trump. The Europeans were aiming instead to match the value of European imports to the U.S. they estimate Trump’s new tariffs will affect—€26 billion. But the 25% tariff under consideration falls slightly short of that, at €22.1 billion. The EU’s individual member states will each vote Wednesday on whether to approve the new tariff.
As for China, Trump threatened to retaliate against its retaliation by adding an additional 50% tariff on Chinese imports if Beijing doesn’t drop its retaliatory tariff. And how did China respond? Predictably. Beijing said it would retaliate.
BlackRock CEO Larry Fink warned that the market turmoil the tariffs have caused is hurting the U.S. economy. “When you see a 20% market decline in three days obviously it has significant impacts and the ripple effects of the potential of tariffs is going to be long-standing,” Fink told a meeting of the Economic Club of New York. “The market is impacting Main Street.”
JPMorgan Chase CEO Jamie Dimon also added his voice to the chorus of financial executives warning that Trump’s tariffs are bad for the economy. In his annual letter to shareholders, Dimon wrote that “the recent tariffs will likely increase inflation and are causing many to consider a greater probability of a recession.” JPMorgan’s own economists are among the “many:” they’ve raised their estimate of the likelihood of a global recession to 60% from 40%.
But if Dimon’s warning seems a tad tepid, it’s for good reason. In 2022, Dimon accused Trump of treason and then last year reportedly supported Democratic Vice President Kamala Harris’ failed campaign for president. Then in January, he appeared to join the ranks of American executives kowtowing to the winning side, telling an interviewer that Trump was using tariffs to “bring people to the table” to negotiate more favorable trade terms. “I would put in perspective: If it’s a little inflationary, but it’s good for national security, so be it,” he said. “I mean, get over it.”
Get over this: Trump’s tariffs may throw the economy into a recession, but they’re also pushing up prices. That makes it difficult for the U.S. Federal Reserve to cut interest rates to try to keep growth going: doing so would likely stoke inflation. With the benched, the risk of stagflation rises.
With stocks down 10% in the past week, leveraged investors are being forced to liquidate even “safe haven” assets like U.S. Treasuries to meet margin calls. That’s giving rise to a “sell everything” trade in markets. The Cboe Volatility Index, known as Wall Street’s fear gauge, has jumped to its highest since early 2020 when the pandemic erupted.