A major risk in the current market: complete disbelief in Trump's tariffs

After repeated "TACOs," the market may be somewhat dismissive of Trump's latest tariff threats.

According to CCTV News comprehensive report, Trump will sign an executive order on Monday to postpone the original July 9 deadline for tariff negotiations to August 1. He announced that starting August 1, the U.S. will impose a 25% tariff on products from Japan and South Korea, and an additional maximum 40% tariff on products imported from 12 countries including South Africa.

However, the financial market's reaction has been rather muted, with the S&P 500 index only falling 0.2%, and the dollar strengthening against the Korean won and Japanese yen by 0.7% and 1%, respectively. Even more surprisingly, the stock markets in Japan and South Korea opened higher collectively, with the South Korean KOSPI index even surging 1.5% at one point during the session.

The Financial Times analyzed that this calm response reflects investors' general belief that Trump's tariff threats will either not be implemented or will have minimal actual impact. The media stated:

As expected, the so-called deadline is not a real deadline at all. Countries were supposed to reach a trade agreement with the U.S. by tomorrow, or face the "reciprocal tariffs" detailed on that famous poster from April. Now, this big day has been postponed to August 1. Like the president himself, the deadlines set by the government must be taken seriously, but not literally. "Taken seriously" because if Trump decides to enforce a deadline, the impact could be significant. "Not taken literally" because he is very likely not to enforce it.

However, it is precisely this market indifference that may sow significant hidden dangers.

Market Disregards Trump's Tariff Threats: Significant Risks Underestimated

The market's dismissive attitude towards Trump's tariff policy may brew risks. Despite the U.S. president continuously issuing harsher tariff threats, the stock and bond markets seem to have concluded that moderate tariff levels will not significantly impact economic growth or corporate profits. But beneath this disregard may lie significant hidden dangers, the report suggests:

The U.S. stock and bond markets seem to have concluded that moderate tariffs—10% on all trading partners—will not have a major impact on economic growth or profits, or even if there is an impact, it will be softened. They simply ignore Trump's ongoing threats of imposing harsher tariffs. So, the biggest question is, when Trump—emboldened by market indifference and economic resilience—suddenly adopts a tough stance, have investors set themselves up for a major disappointment?

However, the report states that this tariff game—somehow—remains in the preparatory stage. Only when agreements are reached with major trading partners that the market believes will be sustained does the game truly begin; the market reacts to these agreements; then the U.S. president responds to the market's reaction. It is believed that Trump will back down from any tariff threats that provoke a sustained negative market reaction. Only when the market is convinced that an agreement will remain stable will it force him to confront the issue. We are still far from that step

The Familiar "TACO"?

The Trump administration's retreat at critical moments has played out too many times.

Nick Twidale, Chief Market Analyst at AT Global Markets, said, "Trump is wavering again. We will see more of this in the coming days, as the U.S. swings back and forth in its negotiation strategy."

Frederic Neumann, Chief Asian Economist at HSBC, also interpreted: "Investors are ignoring the latest tariff announcements, viewing them as a strategy to accelerate negotiations rather than a definitive conclusion on the final tariff levels."

The scene in May of this year is highly similar to now. An article from Wallstreet Insight noted: At that time, the "TACO" trade dominated, and the market completely disregarded tariffs. At that time, Deutsche Bank pointed out:

A significant structural misalignment is currently emerging in the global market, highlighting investors' nonchalance towards the threat of tariffs. Despite the ongoing fermentation of tariff threats and other factors, market performance has been contrary to expectations: U.S. inflation swap prices remain "unchanged," and the assets of the countries most affected by tariffs perform strongly. This indicates that the market has fully adapted to the new normal of the erratic tariff policy