Markets react to sweeping ‘Liberation Day’ tariffs

Markets were rattled Apr. 3, the day after President Donald Trump unveiled a sweeping new trade policy known as “Liberation Day.” The plan includes a baseline 10% tariff on all imports to the U.S., beginning Apr. 5. It also imposes retaliatory tariffs of up to 50% on goods from nearly 60 countries, including China and members of the European Union. The announcement drew immediate backlash and sparked sharp volatility across financial markets.

Countries including Canada, China, and Japan have pledged countermeasures or requested exemptions. At the same time, some economists are warning of inflationary pressure and slowing growth expectations with some even pointing to an increased risk of a recession. However, at the center of it all is a growing sense of uncertainty.

Markets adjusting to unexpected scale of trade measures
“The increased uncertainty is not a positive for the markets,” said Steve Wyett, chief investment strategist at BOK Financial®, noting that investors had expected new trade actions but not at this scale.

This gap between what investors were anticipating and the size and scope of the announced tariffs has in turn rippled through financial markets, triggering sharp equity selloffs and the bond market projecting a rise in the number of rate cuts from the Federal Reserve. As Wyett explained, these impacts on financial markets stem from now-lower expectations for U.S. economic growth, resulting in an outlook for lower corporate earnings and hence, lower stock prices.

Wyett added that concerns about a potential recession are growing, although it’s not certain. “We still hold that a recession is not a given, but chances of one are increasing materially.”

Equity investors ‘panic selling’
However, the recent volatility in both energy and stock markets likely reflects an overreaction, said Dennis Kissler, senior vice president of BOK Financial’s Trading Division. “Most of the tariff increases are likely negotiation tactics, and the panic selling that is occurring is very likely an overexaggeration of the true fundamentals,” he explained.

Kissler added that a market pullback in the range of 15 to 20% is probable and may even be healthy over time. “Corrections occur in all markets,” he said. “A correction of this magnitude should also curb inflation which longer term is a market positive.”

Currency volatility adds to investor caution
Currency markets responded quickly after the tariff announcement, with the U.S. dollar declining against nearly all major trading partners. “Safe haven currencies like the Japanese yen and the Swiss franc typically benefit the most when investors move away from the U.S. dollar, and that’s what we’re seeing now,” said Peter Tibbles, manager of international sales and trading at BOK Financial. “The euro, Canadian dollar and Mexican Peso are all performing well as investors seek alternatives.”

Tibbles noted that liquidity is limited and volatility remains high, with sharp moves in currency rates driven by headlines. “Any headline around tariffs [is] causing substantial moves in currency rates.”

Longer-term risks loom for businesses and consumers
Many experts see the greatest risks in the longer-term impact of the tariffs. Matt Stephani, president of Cavanal Hill Investment Management, Inc., estimates the total economic cost now exceeds $600 billion, including previously announced duties on Mexico, Canada, China and the auto industry.

“These tariffs aim to bring manufacturing back to the United States,” he said. “However, relocating manufacturing operations is a lengthy process, taking years rather than weeks.”

In the meantime, businesses are facing tough decisions about how to manage higher costs. “If consumers resist higher prices, economic growth could slow and global trade could enter a temporary lull,” Stephani said. “Tariffs have a paralyzing impact on the economy in the short run, and a taxing impact over time.”

The consumer response is a key factor. After years of elevated inflation, signs of fatigue are emerging, especially as borrowing costs stay high, and prices continue to rise in sectors like energy and housing.

“Tariffs add another worry to an already slowing economy,” Stephani said. “The chilling impact on oil markets, in particular, is likely to remain as long as tariffs create a headwind to global growth as both importers and exporters feel the brunt of higher costs and potentially lower demand.”

Looking ahead
With the first wave of tariffs set to take effect within days, continued market volatility appears likely. Businesses, investors and foreign governments are closely watching how the global trade landscape evolves. Whether this marks a short-term disruption, or the start of more lasting economic strain may depend on how quickly clarity returns to global markets.

The content in this article is for informational and educational purposes only and does not constitute legal, tax or investment advice. Always consult with a qualified financial professional, accountant or lawyer for legal, tax and investment advice. Neither BOK Financial Corporation nor its affiliates offer legal advice.

Top-of-page photo: Spencer Platt / Getty Staff