Market Brief: Markets Trade Sideways As Trade Uncertainties Loom

The dollar is holding near a three-year low and measures of risk appetite are pointing to subdued trading action after the Trump administration seemingly extended its tariff deadline to August 1—reducing fears of a violent selloff around Wednesday’s original drop-dead date.

Measures of trade policy uncertainty* have fallen sharply from their heights. At an event dubbed “Liberation Day” in early April, President Trump said imports from most countries would become subject to a 10 percent baseline tariff rate, and additional “reciprocal” levies—some ranging as high as 50 percent—would be applied against those running large trade imbalances with the US. However, all but the 10 percent baseline rate were subsequently suspended for 90 days to allow more time for negotiations, and a repeated pattern of climbdowns left markets numb to the threat of a global contraction in trade.

But major questions remain, and effective tariff rates are still far above pre-Trumpian levels. To the best of our knowledge, only China, Vietnam, and the United Kingdom have reached any form of “deal” with the White House in recent months**, and no meaningful legally-binding trade agreement has been concluded with any nation. While the United States is nearing the finalisation of several accords, Treasury Secretary Scott Bessent told CNN yesterday morning that "President Trump's going to be sending letters to some of our trading partners saying that if you don't move things along, then on August 1 you will boomerang back to your April 2 tariff level”. Later in the day, during a media scrum, President Trump stated that he intends to begin dispatching “take it or leave it” letters to trade partners today, outlining new import tariff rates**. “It could be twelve, maybe fifteen,” he said, “and we’ve made deals also, so we’re going to have a combination of letters and some deals have been made”. When asked about the timing of the tariff implementation, Commerce Secretary Howard Lutnick interjected: “They go into effect on August 1. Tariffs go into effect August 1, but the president is setting the rates and the deals right now”.

Markets remain sceptical. The S&P 500 has jumped off its April lows in dollar terms, but remains underwater when adjusted for movements in most major currencies this year, suggesting that investors still see a self-imposed supply shock slowing the American economy and weighing on corporate profits in the years ahead.

A light data week beckons.

The Federal Reserve will publish a record of its last rate-setting meeting on Wednesday, but new insights into the central bank’s policy trajectory are unlikely to emerge. Although Governors Waller and Bowman have begun arguing for delivering a rate cut at the end of this month, most other members of the committee seem content to stay in wait-and-see mode until this year’s trade and immigration policy changes begin to show up more clearly in key economic data releases. Inflation has remained quiescent thus far, business investment is slowing only gradually, and evidence of a cooldown in labour markets has been difficult to discern, with the unemployment rate declining even as hiring becomes increasingly concentrated in the public sector and public sector-adjacent areas. Markets are now convinced that the central bank will stay on hold until September at the earliest, with a full rate cut only priced in for the October meeting.

Bullwhip effects could show up in the UK’s monthly gross domestic product report on Friday morning. The April report showed the economy contracting 0.3 percent, but this is widely believed to have been driven by changes in tax policy and a slowdown in exports to the US—factors which should now be in the process of reversing. The pound took a brief tumble last week when Chancellor of the Exchequer Rachel Reeves broke down in tears in Parliament—and when Prime Minister Keir Starmer appeared to back off his support of her—but has since stabilised, and is now up more than 8 percent against the dollar this year.

Canadian employment figures, also due Friday, may hint at a stabilising labour market, but are unlikely to materially shift the trajectory of the loonie. Canada’s job market has weakened markedly this year, with elevated uncertainty and waning investment weighing heavily on trade-exposed sectors, stalling monthly job gains and pushing the unemployment rate above the 7 percent mark. Yet domestic demand has remained resilient, and there are growing indications that last year’s rate cuts by the Bank of Canada, forthcoming fiscal stimulus, and Canada’s relatively-advantageous access to American consumer markets could help narrow the growth gap with the United States in the months ahead. Taken together, these forces may be sufficient to keep the Canadian dollar relatively well-supported—even if the greenback regains its poise.

Taken in sum, the reality show playing out at the White House is likely to overshadow events in the real economy over the coming days, meaning that currency hedgers should be keeping an eye on social media feeds more than statistical agency websites. As a certain fictional gladiator once put it, “Are you not entertained?”.

*These are, admittedly, imperfect. Most "uncertainty" indices are designed to capture sentiment shifts in media coverage, and can therefore miss, or misrepresent, changes in perceptions across the real economy.

**Trump also last night threatened to impose an additional 10-percent levy on countries aligning with the "Anti-American policies" of the BRICS country grouping, but this provided insufficient clarity to move markets.

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