Volatility in global markets: the impact of US-China tariffs - Chris Harmse

Volatility in share, bond, and exchange rate markets is set to prevail for a long time. The sudden back-paddle of President Donald Trump's tariff calls, by decreasing tariffs to most countries back to only 10% (except for China), was, as expected, a sign that he called the bluff of all the countries over the past few weeks.

Analysts also feel that his administration may not have expected the backlash from US citizens as a gloomy high inflation rate, a potential US recession, and increasing unemployment surfaced. The theoretical principles that higher tariffs will always lead to welfare losses for consumers has surfaced strongly.

JPMorgan Chase CEO Jamie Dimon said the US economy faces "considerable turbulence" against the escalating US-China tit-for-tat tariff announcements, which creates fear amongst consumers, investors, and businesses.

The announcement that China on Friday reacted to Trump's ballooning tariffs, raising its duties on imports of US goods to 125% from 84%, accelerated worries of volatility across the globe. The White House on Thursday raised US tariffs on Chinese imports to 145%, from the 125% that was announced earlier.

US equity markets are also trading much weaker than at the beginning of the year (-10.4% for the Standard & Poor's 500 index) and are also contracting week by week in an extremely high frenzy of volatility. People also started to blame the Trump administration for manipulation of equity markets.

Trump's trade war is now only pointed at one country - China. The effects of the enormous tariffs from China and the US on each other have already led to Tesla abandoning its orders to China for its US-made Model S and Model X vehicles.

The US-China trade war overshadowed the news that the US inflation rate came down for a second consecutive month to 2.4% in March 2025, the lowest since September 2024, much lower from 2.8% in February, and below forecasts of 2.6%. Under normal circumstances, this rate would have pointed strongly towards a cut in interest rates by the Federal Reserve at its next meeting next month.

Equity markets, however, reacted positively to the news, which saw the Dow Jones index improve by 2.4% after the lower inflation rate announcement, the S&P 500 gain 2.3%, and the Nasdaq index rise by 1.8%.

Domestically, although South African share, bond, and foreign exchange markets also experienced a high level of volatility, the overall performance of these markets still outperforms most developed and developing countries. On the JSE, the All Share Index (ALSI) shot up by 6% last week, offsetting all its losses of the previous week's large sell-off. At the close of Friday, the index still traded 2.3% up for the year-to-date. That against the -3.43% loss of the India Nifty index, and -14.6% year-to-date loss by Japan's Nikkei index.

The ALSI was helped by the gold price reaching a new record high of $3 233 (R61 813) per ounce on Friday. On the foreign exchange market, the Rand recovered strongly last week. Against the US dollar, the currency improved to R19.07 to the dollar on Friday after trading at one stage last Tuesday at R19.74. Against the UK pound, the Rand recovered to R24.91/£, and R25.19/£ last Tuesday, and traded Friday at R21.63/€ against the Euro.

The Brent oil price dropped dramatically last week to as low as $61.50 per barrel. This is $13.17 per barrel lower than the $74.67 per barrel on March 31, 2025, that was used to establish the fuel prices for April. At this stage, the price for 95 Unleaded Petrol (ULP) is 13 cents per litre and the price for diesel of 34c per litre is over-recovered. This can contribute to the third consecutive month of fuel price cuts in South Africa.

Domestically, the market awaits the release of South Africa's retail sales for February 2025 on Wednesday. It is expected that they will have continued to recover strongly on an annual basis, growing 6% on last year's February figure.

On global markets, investors wait for the release of the US retail sales data for March 2025. Of interest will be the announcement of the gross domestic product  economic growth rate for China in the first quarter 2025 on Tuesday, and the UK inflation rate for February to be announced on Wednesday.

Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.

*** The views expressed here do not necessarily represent those of Independent Media or IOL.

BUSINESS REPORT