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We have all seen the headlines, the United States is embarking on the biggest and broadest tariff issuance in more than fifty years. What does it mean, how does it work and how will it affect global markets?
What Are Tariffs and How Do They Work?
The US has just initiated broad based tariffs on all counties that have a trade surplus against America. A trade surplus means that the country exports more goods to the US than it imports from the US, which is typically a sign of economic health. Countries engage in trade surpluses because they focus on producing competitive goods and importing those they don’t produce efficiently.
President Trump won the election based on tariffs. He sold them to the American voters as a way for America to bring jobs back and to increase tax revenue, from non-residents.
However, the tariffs, initially aimed at China, have expanded to other major trading partners.
How Tariffs Affect Prices and Inflation
Using China as an example, if they sell something to an American at a price of $1.00, tariffs will raise the price, potentially doubling the cost. This theoretically benefits locally produced goods, which become cheaper compared to imported items. However, local companies often increase their prices to take advantage of the situation, leading to inflated prices across the board.
While this increases the margins for local products, it also results in inflation, which erodes purchasing power over time. Inflation is one of the largest drivers of financial market behavior, making it crucial to monitor its effects on asset classes.er over time, which is why inflation is one of the largest drivers for financial markets.
Market Reactions to Rising Inflation
The current tariff environment is contributing to significant market volatility as investors adjust to the inflationary pressures caused by rising prices. Key market impacts include:
- Weaker US equities
Price hikes can lead to reduced sales, negatively impacting U.S. stock performance.
- Weaker USD:
Inflation diminishes the value of the U.S. dollar over time, leading to a weaker currency.
- High Gold volatility:
The increasing inflation, coupled with potential slowing demand in the U.S., is creating price fluctuations in gold.
Trump’s Stance on Currency Manipulation
Trump is also saying that “currency manipulation” is also being addressed by tariffs. He specifically calls out China for currency manipulation as its currency remains in a tight band, controlled by the Central Bank. This manipulation is a concern that the tariffs are intended to address, aiming to level the playing field for US industries.
While currency controls are common in Southeast Asia, Trump believes that this creates an unfair trade advantage. For traders, these geopolitical tensions lead to higher market volatility, which presents both challenges and opportunities.
Opportunities for Traders Amidst Volatility
From a trading perspective, volatility is a good thing. A trader can’t profit from a trade if it simply goes sideways and the increase in volatility has combined to form bigger and more frequent moves. This kind of environment is perfect for trading.
But as a caution, it’s important for the trader to remain vigilant, carefully setting stop-loss orders and profit targets. It’s essential to understand that during volatile times, stop-loss orders may be executed at a distance from their set position due to price fluctuations.
Check out important terms you should know as a trader here!
To manage this risk, Vantage Markets Australia provides negative balance protection, ensuring that clients will not lose any more than their funds in their account.
With the right risk management strategies in place, the next few months could present some of the best trading opportunities seen in years.
Navigating Lower Volatility Markets
For those new to trading or wary of the extreme volatility, there are less volatile options available. The UK, Australia, Hong Kong and Singapore, all have trade surpluses with the United States, are expected to be relatively immune to the impact of tariffs. While these markets have experienced some volatility since the tariff discussions began, they are likely to remain excluded from future tariff actions.
Importance of Risk Management in Volatile Times
In these high volatility times, robust risk management strategies become even more critical. Traders and investors should reappraise their risk tolerance per position to ensure that the position size they are using allows the placement of stops wide enough not to be whipped out on these big spikes, while still within drawdown expectations.
Disclaimer: The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our client. No representation or warranty is given as to the accuracy or completeness of this information and therefore it shouldn’t be relied upon as such. Any research provided does not have regard to specific financial situations, needs or investment objectives. Vantage accepts no responsibility for any use that may be made of these comments and for any consequences that result. Consequently, any person acting on it does so entirely at their own risk. We advise any readers of this material to seek professional advice where necessary. Without the approval of Vantage, reproduction or redistribution of this information isn’t permitted.
