Special Report written by LGT Crestone Chief Investment Officer Scott Haslem, Senior Asset Allocation Specialist Matthew Tan and Head of Public Markets Todd Hoare.
On 2 April 2025, US President Donald Trump announced a minimum 10% across-the-board tariff on goods imports into the US and a slew of targeted reciprocal tariffs against a range of major trading partners. In doing so, he has chosen to use the highly anticipated ‘Liberation Day’ to further his aggressive actions on trade, threatening to take the global economy to the brink of a significant (and disinflationary) downturn in order to achieve his goals.
In this Special report, we outline the key announcements and immediate implications from ‘Liberation Day’. We also revisit our constraints-based analysis of the Trump 2.0 Administration in an effort to better understand Trump’s ultimate near-term goals, how much longer he can afford to aggressively pursue them and present some key signposts to help investors chart a path through the turbulent waters ahead.
The table below outlines the key reciprocal tariffs that US President Trump announced on major trading partners on 2 April, incorporating the 10% across-the-board tariffs that will also be implemented in early April. These tariffs are in addition to previously announced 25% duties on imported steel and aluminium and 25% tariffs on imported automobile and automobile parts.
Amid the headline noise, however, the Trump Administration has made it clear that it is open to negotiating on the tariffs. Trump himself called out these areas: currency (effectively calling for others to let their currencies appreciate against the US dollar), tariff and non-tariff barriers, and on-shoring of foreign manufacturing into the US. While the opening salvo has clearly been more aggressive than markets were expecting, it still broadly fits in with Trump’s style of opening negotiations with a maximalist position that is then moderated following negotiations.
Country/Region | US reciprocal tariffs |
China | 34% |
European Union | 20% |
Australia | 10% |
UK | 10% |
Japan | 24% |
India | 26% |
Source: White House
Trump’s aggressive ‘opening bid’ presents near-term downside risks for economies and markets.
Unsurprisingly, the immediate reaction from commentators and financial markets has been histrionic. We do believe that there is at least some valid reason for concern—at least as a starting point, the announced tariffs would increase the US’ average effective tariff rate to around 25%, many times larger than analysts were expecting and well above prevailing rates just four months ago.
While some deals will likely get done, the interim damage to business and consumer sentiment (and therefore economic activity) are likely to be substantial. Analysis from PIMCO suggests that US growth could be flat or slightly negative this year from a hitherto robust 2.7% annualised rate during the second half of 2024. In other words, Trump is threatening to take the US to the edge of recession (and perhaps beyond), and near-term downside risks to economic activity have clearly risen.
What hasn’t risen, in our view, is fundamental inflation risks. We continue to push back strongly against the prevailing narrative that tariffs are inflationary - in fact, as we discussed extensively in our April CIO Letter, tariffs are ultimately disinflationary due to the significant damage they wreak on business and consumer sentiment (and activity), as we are seeing today. The economic theory and historical reality both back our strongly held thesis.
The 2017 tax cut extension remains Trump’s overarching goal, and its passage remains his number one priority.
While he talked a tough talk, we couldn’t help but notice that Trump ended his remarks with a pointed focus on extolling Congress to help pass his “big beautiful” 2017 tax cut extension bill. We believe these seemingly throwaway comments actually reveal that the 2017 tax cut extension remains Donald Trump’s ultimate objective for this year and is the underlying driver for his seemingly anarchic actions.
As we wrote, it is imperative for Trump to pass the tax cut extension—it was a key election promise, US voters will otherwise face a significant tax hike once they expire this year, and (if passed) it will form a key pillar of his 2026 mid-term election campaign. We have a high conviction view that, while he is not up for re-election, Trump is highly motivated to retain control of Congress in 2026. He learned a harsh lesson from losing Congress in the 2018 mid-terms, rendering him a lame duck during the final two years of his first term, and he thus wishes to avoid a similar fate this time around.
The main mechanisms for Trump to pass this ‘beautiful bill’ are:
We believe that Trump is also well aware that he has a vanishingly narrow majority in the US House of Representatives—indeed, he has already withdrawn the nomination of Representative Elise Stefanik as Ambassador to the United Nations, citing concerns that a special election to replace her seat in the House may jeopardise the Republican majority. We believe Trump’s outward aggression and ‘show of strength’ may partially be ploys to mask this significant legislative vulnerability.
We still believe that Trump will ultimately have to moderate his positions as he runs into the constraints of voters, Congress, and a multi-polar world.
Amid the chaos and noise, we revisit our constraints-based framework. While he is clearly pushing the limits of these constraints, we highlight below three key areas that we believe will ultimately restrain Trump and will likely compel him to moderate his position from here. In other words, if our analysis proves true, then we may be at or near the peak of US trade-related downside risk.
Trump and Treasury Secretary Bessent have both signalled in recent weeks that they are willing to tolerate near-term pain, and even a potential recession in the US, in order to achieve their goals. We believe this is a bluff—the Trump Administration cannot actually afford to tip the economy into an actual recession with actual job losses and business closures, particularly if the blame can be squarely laid at their feet. As and if this risk comes into clearer view, we expect them to pivot.
There are two key reasons for this. First and foremost, voters are not daft, and will heavily punish Trump and the Republican party if they lose their jobs. Voters elected Trump to fix immigration and inflation, not to start a global trade war, and we are already seeing signs of ‘buyers remorse’ in a swing towards Democrat-aligned candidates in several special elections, including in deep-red Florida. A deep recession would severely damage Trump’s ability to retain Congress in 2026. In addition, a recession would substantially worsen the US fiscal deficit through automatic stabilisers and reduced tax revenue, which would make it even harder for Trump to pass his 2017 tax cut extension.
The US Senate has already passed a (mostly symbolic) resolution condemning Trump’s tariffs on Canada, with four Republican Senators crossing the floor to make their stand, with a further bipartisan bill being proposed intending to wrest back Congressional authority over tariffs and trade policy. While these bills are unlikely to make it through the House or Trump’s veto, they do show a much more active Congress that may (finally) begin attempting to reclaim the various legislative powers that it has delegated to the Executive Branch over the years.
In the near-term, this may manifest through the convoluted reconciliation process required to pass the 2017 tax cut extensions. Ultimately, Republicans need to pass this legislation as much as Trump does, but they could use their leverage to extract their ‘pound of flesh’ and remind him who holds the power of the purse. Over the longer-term, we may very well see more attempts by Congress to limit Executive overreach and re-assert its status as a co-equal governing branch under the US Constitution.
China, Japan, and South Korea may have already given a blueprint for world powers who wish to stop playing the ‘tariff game’ with the US.
A lesson that every child bully learns sooner or later is that if they bully everybody else, eventually nobody will want to engage with them and they end up in a lonely corner. For all its economic, military, diplomatic, and cultural might, the US may soon be about to experience this firsthand.
As we outlined in our February 2025 Observation, The New Great Game, the US is no longer the dominant global hegemon and while it clearly has the capability to bully several economic blocs at the same time (eg Canada, Mexico), Trump may find that he has overplayed his hand with this latest round of tariffs, in particular the disproportionate aggression against Asia’s vibrant export economies. Indeed, China, Japan, and South Korea have already held their first joint economic dialogue in five years in anticipation of ‘Liberation Day’ and have already agreed to jointly respond to the US tariff offensive.
Ultimately, rather than engaging in a severely damaging tit-for-tat trade war with the US, the rest of the world may instead decide to support their local economies via fiscal policy and engage in more comprehensive trade agreements amongst themselves to the exclusion of the US. After all, ‘take your toys and play elsewhere’ is a tried and true way to deal with a bully. A multi-polar world playing out without the US at its core would be seriously detrimental to its long-term health as an economy and a Great Power, and we would expect the rising probability of such a scenario to force a substantial pivot in US policy.
The backdrop today is very different to Trump 1.0, though Australia may be comparatively well positioned.
There are several interesting dynamics associated with events of the past week, and although Trump 1.0 provides some “history” to current events, the backdrop is sufficiently different to make such comparisons less reliable:
In a relative sense, Australia seems to have dodged the worst of the tariff storm. However, the knock-on effects that tariffs have on business confidence and capex intentions now come with a larger margin of error. This is compounded by our Reserve Bank that is still not fully committed to its rate path, and now has to contend with the growth vs inflation uncertainty that this brings. China's fiscal and monetary response to this round of tariffs bears close watching, given its economic linkages to Australia. While we ultimately see the disinflationary effect of tariffs allowing a steeper trajectory of rate cuts than currently priced (and so supportive for the Australian economy and equities), domestic equity investors may have to endure several months of heightened volatility before this policy pivot becomes clearer. Ultimately, little of this dissuades us from our view that mid cap domestic equities, with less global growth sensitivity, will prove to be a source of relative resilience in a potentially tumultuous few months ahead.
Acknowledging the shift in dynamics compared to Trump 1.0, we have outlined below a range of top-down and market-based signposts that we are keeping our eye on to manage risk, seek opportunities, and navigate through this period of uncertainty and volatility.
Investors should watch for signs that Trump’s constraints are starting to bind him, monitor the shape and feel of the international response, and watch the hard data for signs of a Fed pivot.
In particular, we are watching for further Congressional pushback, particularly in relation to the 2017 tax cut extensions. We believe Trump will be sensitive to anything that jeopardises this key policy objective. We will also be carefully monitoring the actions of both Trump and Bessent as the economic reality of a recession looms larger in coming weeks.
We think Trump’s clear indication that he is open to negotiation betrays the underlying weakness behind his play and the potential realisation that he may have overplayed his hand. We will be watching the international community’s response to ‘Liberation Day’ closely, in particular how lenient or harsh a stance Trump takes in individual negotiations with counterparties, the extent to which blocs like China or the European Union choose to retaliate, and whether we see a growing tide of ‘ex-US’ trading frameworks start to take form. The relative balance between these responses will give investors significant clues as to where ‘the puck is going’ in terms of deploying capital into this market weakness.
Having opened with a maximalist stance on trade, Trump and Bessent are clearly accelerating their game of ‘economic chicken’ with Fed Chair Powell in their attempts to compel the Fed to cut rates. We do ultimately believe that Powell will blink first and that the Fed will be forced to cut rates more aggressively, particularly as Powell has 450 basis points of rate cuts up his sleeve that society will expect him to use. That said, Powell will likely need to see the hard data (jobs and jobless claims, retail sales) or financial markets weaken further from here before he will acquiesce. We are keeping a close eye on nonfarm payrolls, retail sales, weekly jobless claims, consumer confidence, and business confidence as we map out the path to the eventual Fed pivot.
From a markets’ perspective, the VIX, 200-day moving average, BBB credit spreads, and signs of market ‘capitulation’ may help astute investors identify the appropriate inflection points to ‘buy the dip’.
In addition to the macro and geo-political signposts above, there are several market-based indicators that investors would be well served monitoring for potential inflection points to ‘buy the dip’:
While we remain comfortable with our overall outlook and modest overweight to equities, we have taken two opportunities in recent months to de-risk our tactical positioning and add some near-term defence to portfolios. In February, we closed our overweight to Australian equities, and in March we added to global bonds prior to ‘Liberation Day’. Both of these moves have helped take some of the ’sting’ out of recent market volatility and given us enough ballast so that we can live to fight another day and prepare ourselves to lean in when the time is right.
Staying nimble and trusting to a diversified, multi-asset investment strategy will be investors’ best friend in these volatile times.
As part of our 2024 investment strategy review, we have already positioned our strategic asset allocations (SAAs) for a higher growth, higher inflation, and a more volatile world. This includes an uplift to our (already significant) allocation to alternative assets, particularly in areas like infrastructure that are keyed into secular growth thematics, a comprehensive review and refresh of our fixed income portfolios, and the adoption of a total portfolio approach to currency management.
All of these elements will be doing their duty and provide diversifying protection and ballast during the current equity market drawdown, exactly as they have been designed to do. Indeed, the recent sharp decline in bond yields (despite the ‘stagflationary’ headlines!) reinforces our view that fixed income can still serve an important role in client portfolios in today’s world.
We encourage investors to check their current portfolios against their SAAs, make sure they remain appropriate for them, and where appropriate, consider rebalancing back towards their strategic or tactical targets. A disciplined approach to rebalancing, with its embedded characteristic of ‘buying low and selling high’ is one of the most reliable ways to create value over the long term and is one of the best tools in the astute investor’s toolbox.
As with most market shocks and volatile periods, the most important message that investors should take from ‘Liberation Day’ is to not panic. Rather, we encourage investors to stick to their frameworks (we have laid out ours above), calmly analyse and assess the latest developments using those frameworks, and think calmly through the most likely pathways forward and the key signposts to measure them.
Having outlined our assessment and positioning in regard to these, we re-iterate that in a more uncertain world, we are maintaining a flexible and nimble approach to our tactical asset allocation, and stand ready and willing to shift our positioning in response to the evolving risks and opportunities across financial markets.
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