“The delay in enforcing tariffs suggests that President Trump would rather make deals than not and, by singling out individual countries such as Japan and South Korea, he is applying pressure to other countries by example. It has for weeks now felt highly improbable that there would be a repeat of the ‘liberation day’ sell-off,” Wyn-Evans said yesterday. 

Mark Haefele, chief investment officer at UBS Global Wealth Management also expects country-specific deals and arrangements in the coming weeks: "These could include a baseline tariff and selective quotas or exemptions from sectoral tariffs in exchange for purchase commitments or US investment pledges. While Trump said he is only days away from sending a tariff letter to the European Union, he also said trade talks have been going well with the bloc." 

Japan, South Korea 
US President Trump signed an executive order extending the reciprocal tariff deadline to August 1 from July 9, while announcing marginally higher reciprocal tariff rates on Japan from 24 per cent to 25 per cent. He also announced 25 to 40 per cent on goods from another 12 countries including smaller Asian economies and South Africa. Louis Chua, equity research analyst Asia at Swiss private bank Julius Baer, views this development positively, and believes that the US recognizes Japan’s constraints on doing a deal ahead of its July 20 Upper House elections. “Should the ruling coalition retain its majority, there could be heightened prospects for a trade deal to be signed with the US ahead of the August 1 deadline,” Chua said.

While market volatility is expected to pick up, he remains optimistic on the prospects of the Japanese market, driven by sustained momentum in corporate reforms and lasting improvements in corporate governance among leading Japanese corporates.

“Similarly, given that the President of South Korea only assumed office on June 4, extending the reciprocal tariff rate of 25 per cent without making any changes would also give both countries sufficient time to complete trade negotiations,” Chua added.

Globally
On a global level, a survey of clients by investment bank Goldman Sachs last week revealed that around two-thirds of respondents expect the average US tariff rate to settle in the 10 to 15 per cent range. “The effective rate of US tariffs will still likely be its highest for around 100 years – somewhere above 14 per cent. That’s around $270 billion of tariffs per year. Whilst $60 billion of tariffs have already flowed into US government coffers since April, no-one has yet eaten the tariffs fully,” Tony Whincup, head of investment specialists at UK wealth manager TrinityBridge, said.

Meanwhile, asset manager Aberdeen expects the US weighted average tariff rate will ultimately settle back around the 12 per cent mark as more countries strike deals with the US.  

“While tariffs will likely remain high – compared with levels at the start of the year – as will the headline risk, we believe the US effective tariff rate should end the year at around 15 per cent," Haefele continued. "This would be a headwind to growth but not enough to trigger a recession, in our view, given the resilience of the US consumer and the adaptability of global supply chains." 

“Investors might now be able to return to ‘business as usual’ over the next few weeks, meaning that the focus will shift to economic data and the second quarter company results season,” Wyn-Evans added. Key indicators will include measures of US inflation, as the extent to which tariff costs are assessed and a weaker dollar have been passed on to consumers, and whether the US Federal Reserve will be given an opportunity to cut interest rates. Employment data will also be important.

David Kohl, chief economist at Julius Baer, also highlighted that the threat of higher tariffs remains, creating headwinds for US investment intentions and increasing uncertainty about higher US inflation. “The ongoing threat of higher tariffs intensifies stagflationary risks in the US and puts pressure on Europe to stimulate domestic demand further in order to offset headwinds in international trade. China’s export-oriented growth strategy is expected to focus even more on markets outside the US,” Kohl said.

Whincup believes that after a stagflationary summer, the fog may clear into the fourth quarter allowing the Fed to cut again and reboot a soft landing.

Asset allocation 
“We’ve moved to modest positive on duration and corporate risk, further upgraded our positive signal on infrastructure and become negative on the US dollar. We’ve held our modestly positive position on equities, both developed and emerging markets, but it is tempered after the rally since the initial pause on the “liberation day” tariffs,” Peter Branner, chief investment officer, at Aberdeen, said.

Aberdeen highlighted that a significant increase in European defense spending is coming. NATO members are coalescing on increasing defense spending from 2 per cent of GDP to as high as 5 per cent over the medium-term. While the growth multipliers of defense spending are low, this will nonetheless be a tailwind for European economies. “That said, in equity markets, the European defense sector has already seen very material outperformance. Very lofty sales and earnings expectations are now baked into current valuations,” the firm added.

"We continue to recommend phasing into global equities or diversified portfolios to navigate volatility ahead," Haefele concluded.