Markets take Trump’s tariff threats in their stride

European stocks have surged to session highs on Wednesday, although the tone of President Trump’s rhetoric on tariffs has hardened in the past 24 hours. The President said there will be no extension of the August 1^st deadline to impose tariffs, he slapped punitive tariffs on copper and threatened a 200% tariff rate on pharmaceuticals. The market is not taking Trump at his word when it comes to tariffs, and the market impact has been limited so far. However, the risk is that the President uses this period of calm in financial markets to unleash another round of chaos in order to meet his goals to ‘make America great again’.

The bond market has stabilized after Tuesday’s sell off, and bond yields are retreating on Wednesday. In the past week, 10-year European yields are marginally higher, however, Treasury yields are higher by 12 basis points. This suggests that the double whammy of the ‘Big Beautiful’ US Budget Bill and Trump’s latest raft of tariffs is impacting US bond markets more than elsewhere. Thus, this evening’s FOMC minutes will be worth watching. We expect the minutes to reinforce the Fed’s wait and see stance when it comes to loosening monetary policy. The recent spate of good economic data buys the Fed time to assess the inflationary impact of tariffs.

Will the Fed dash hopes of 2 rate cuts this year?

Ahead of the FOMC minutes, the Fed Fund Futures market is expecting just less than 2 rate cuts for the rest of this year. Some analysts think that the Fed will scale back rate cuts, as tariffs weigh on the inflation outlook. S&P 500 futures are pointing to a mildly higher open on Wednesday. Although US stocks have backed away from their highs, price action suggests that traders and investors are not worried about the US’s latest round of tariff threats. The market is now used to the President scaling up his rhetoric, before backing away from his threats. There is absolutely no reason to believe that the US will impose a 200% tariff on pharma imports, which is why pharma is the top performing sector on the Eurostoxx 50 on Wednesday.

What’s going on with copper?

The commodity space is also worth watching after US tariffs were slapped onto copper. The 50% rate is designed to encourage mining and smelting in the US, but it is unclear whether this tariff will reach its aim. The metals market has front-run expected tariffs from the US, and metals traders have sent record volumes of copper to the US in recent months. There are currently shipments of copper due to be delivered to the US, the question is will these shipments that are already on the water face the 50% tariff rate, and what forms of coper will the tariff rate apply to? Although the price of copper listed in the US surged on Tuesday, the price of spot copper fell. If shipments of copper are subject to the 50% tariff rate, this could push up prices of the metal in the US. However, if those shipments are diverted from the US to elsewhere, then it could boost supply outside of the US and weigh on prices. Hence, the divergence.

Market takes tariff chaos in stride

Trump’s tariffs cause chaos and confusion, however, this time they are not triggering bouts of extreme volatility. We expect mild sell offs in the coming weeks, as we wait to hear whether Trump will levy pharma imports, and what the tariff rate is for the EU. The FX market is stable on Wednesday, with small declines for the euro and the yen. Along with the bond market, which is also stable, it suggests that investors are waiting for another driver before making directional moves.

Stock market rally looks healthy

For the stock market, low volatility is helping to boost momentum, and further upside for key indices. The S&P 500’s recent leg higher has not been driven merely by the tech sector. The equal weighted S&P 500 index is outperforming the market capitalization-weighted S&P 500, which is a sign that it might take a big negative shock to knock the main US blue chip index from its record highs.