Trump’s Tariff Threats Weigh on Markets

Despite announcing an extension of tariffs to 1 August from 9 July,  on Monday, US President Donald Trump threatened several countries with higher levies. As a result, the US dollar index (DX) and Brent Oil (EB) prices rose due to growing concerns that higher duties will pressure inflation. 

The S&P 500 (ES), Nasdaq (NQ), and Dow Jones (YM) all declined, with Tesla (TSLA) also falling following Elon Musk’s foray into politics. All the while, Fed Chair Jerome Powell is under the spotlight once again, this time accused of lying about a $2.5 billion renovation at the Fed’s headquarters, which Trump urged Powell to resign for.

Looking ahead, market participants will be interested in the FOMC Minutes, scheduled for release on Wednesday, as recent news headlines complicate the path to interest rate easing.

Tariffs Extended, But Partners Face Ultimatum

Major US indices declined on Monday after President Trump sent letters to trade partners threatening to reinstate “Liberation Day” tariffs if no deal is reached by 1 August. He sent letters to 14 countries, including Japan and South Korea, which may face tariffs of up to 25% when the new deadline expires. 

This comes after Trump extended the original deadline on 9 July in hopes that other countries would agree to his terms. He remarked over the weekend that countries without a deal by the new deadline would face duties of up to 70%. He also threatened its trading partners that siding with BRICS countries would result in additional tariffs of 10% on top of existing levies for being “anti-American,” as officials met in Rio de Janeiro and expressed “serious concerns about the rise of unilateral tariff and non-tariff measures.”

In trade deals, the US has struck agreements only with the UK and Vietnam since April and signed an initial deal with China on specific export controls in Geneva back in June. However, talks with the European Union may be progressing well, with the trading partners still aiming to sign by Wednesday, 9 July. Notably, the EU had been threatened with a 50% levy beforehand.  The upcoming deal does not resolve the existing steel and aluminium (ALI) tariffs, which are set at 50%. However, the US offered a 10% baseline tariff deal on EU goods, with some exceptions for sensitive sectors, such as aircraft and spirits, which allowed the euro (EURUSD) to recoup some of its losses. 

Still, uncertainty in global markets remains, particularly regarding the impact of tariffs on consumer demand and oil prices (CL).

Oil Rises on Tariffs, Houthi Attacks

Despite concerns stemming from Trump’s tariffs and their negative impact on the oil markets, money managers recently increased their long positions in crude up to 1 July. Data from the travel group AAA showed that a record 72.2 million Americans were expected to travel for the Fourth of July, keeping short-term demand high. 

Coupled with Trump’s tariff announcement and an increase in Arab Light cargoes to Asia by $1 per barrel instead of the expected $0.50-$1, WTI and Brent rose to fresh session highs. Prices had started the week on a weak footing following the OPEC+ decision to increase its production output by 548K barrels per day in August, up from 411K in July.  Oil also got a boost from a Houthi attack on a Greek-operated bulk carrier ship off Yemen’s Hodeidah coast, the second attack on a Greek-managed carrier since Sunday. Both ships carried the Liberian flag. 

Meanwhile, Trump and Israeli Prime Minister Benjamin Netanyahu met behind closed doors in Washington on Monday to discuss ceasefire talks. When asked about the Palestinians’ relocation, Trump said that neighbouring countries cooperate. Previous conflict de-escalation often weighed on oil prices, which Trump prefers to support his Energy agenda and lower interest rates. But he faces resistance from the Fed Chair. (Source: Reuters)

Feuds with Powell and Musk Continue

Trump’s calls for lowering interest rates to 1% have yet to transpire as the US President faces resistance from a Fed Chair reluctant to cut due to, well, Trump’s tariffs. On the one hand, Trump wants government debt to be lower, but Powell worries about inflation spiralling back up. If history is any guide, when politicians get involved in the Fed’s operations, a recession often follows. But this time could be different. A new paper by the New York and San Francisco Feds found that the Fed has more room to reduce rates now rather than cut them more aggressively later on. 

Still, Trump has signalled Powell’s “Shadow” to undermine him, and he is now threatening to resign for lying to Congress about the renovation costs of up to $2.5 billion at the Fed’s building. Federal Housing Finance Agency (FHFA) Director William J. Pulte has said Powell “made a number of factually inaccurate statements to the Committee regarding the Fed’s plush private dining room and elevator, skylights, water features, and roof terrace.”

Nonetheless, as the Fed leadership change escalated, the feud between Trump and Tesla CEO Elon Musk also resurfaced on the wires. Musk accused Trump of misleading the public about Jeffrey Epstein, as well as criticising his bill. Notably, Musk launched a third political party, the ‘America Party’, following previous comments to do so if Trump’s spending bill passed, to end America’s one-party system. As a result, Tesla shares lost 7% on Monday, 7 July, as investors worried about the potential impact on the company given Musk’s expected loss of focus. (Source: Barrons )

Conclusion

The FOMC minutes release looms on Wednesday as traders look for clues about the Fed's appetite for cuts amid Trump's tariff threats. Powell's credibility hangs in the balance following his $2.5 billion renovation scandal. 

With "Liberation Day" tariffs threatening global trade, oil markets whipsawing between geopolitical concerns and demand worries, and US equity indices shy off record highs, Wednesday's minutes may set the tone for short-term market direction.

*Past performance does not reflect future results.