Is the market set for another 'Liberation Day' like selloff?
Trump fires off tariff threats to over a dozen countries with rates as high as 40%, yet markets barely flinch. Here's what you need to know.
Source: Shutterstock
KEY POINTS
- President Trump sent tariff threat letters to 14 countries including Japan, South Korea, and Malaysia, with some facing tariffs as high as 40% ahead of the August 1st deadline.
- Markets showed muted reactions with major US benchmarks down less than 1% while the ASX 200 is trading flat on Tuesday.
- Rising bond yields have historically forced Trump to retreat on tariff threats and the US 10-year yield is starting to push the 4.40% level.
- The S&P 500's forward P/E ratio sits at 20-year highs while Australian markets closed FY25 near record valuations, leaving little room for error if trade tensions escalate.
It's Liberation Day all over again, with President Trump unleashing a wave of new tariff threats to key trading partners including South Korea, Japan and Malaysia.
The news drove equities lower, with the S&P 500 and Nasdaq down 0.79% and 0.92% respectively, while the US 10-year bond yield inched 3 bps higher to 4.38%. Gold prices rose 0.4% to US$3,332 an ounce on safe-haven demand and the VIX hit a two-week high on renewed market volatility.
Trump's Latest Trade Offensive
Trump sent letters to 14 countries overnight threatening new tariffs, marking a significant escalation in his trade pressure campaign ahead of the August 1st deadline.
The leaders of Japan and South Korea were the first to receive letters on Monday, followed by screenshots of signed form letters sent to Malaysia, Kazakhstan, South Africa, Laos, Myanmar, Tunisia, Bosnia and Herzegovina, Indonesia, Bangladesh, Serbia, Cambodia and Thailand.
Japan and South Korea faced tariffs of 25%, with some countries facing tariffs as high as 40%.
Trump's letters carried additional warnings about transshipped goods, which will face higher tariffs, and any retaliatory measures will be matched or exceeded by the US. The letters represent "take it or leave it" offers as Trump pressures countries to negotiate trade deals before the August 1st deadline.
Meanwhile, the US is currently working on deals with India, which has reportedly put forth its best offer, and the EU, which is rushing to lock in a tariff rate no more than 10%.
Markets Showing Resilience
Despite the renewed trade tensions, markets are holding up relatively well. Major US benchmarks fell no more than 1% overnight and the S&P/ASX 200 trading flat on Tuesday.
This muted reaction may reflect what analysts have coined the "TACO trade", which stands for "Trump Always Chickens Out,". In addition, markets have been buoyed by improving breadth and growing rate cut expectations.
The TACO trade emerged from Trump's pattern of announcing aggressive tariffs followed by strategic retreats. The 145% tariff on Chinese goods announced in April 2025 was later reduced to 30%, and the 50% tariff on EU goods was delayed until July 9. These moves typically cause initial market dips, followed by aggressive rallies when tariffs are scaled back or paused.
As Brew Markets puts it, "in other words, when Trump announces new tariff policies, it might be a good time to buy."
Source: Brew Markets
The Bond Market Constraint
Memes aside, there's a fundamental reason why Trump has had to back down on tariffs – rising bond yields. Every time tariffs are pushed higher or trade tensions escalate, bond yields rise, reflecting several key concerns:
Inflation fears: Trump's tariff policies are inherently inflationary
Market pressure: Volatile bond yields typically place downward pressure on equity markets
Financial stability: Rapid yield increases can destabilise financial markets and potentially trigger broader economic disruption
Below, we've plotted the timing of when Trump scaled back or paused previous tariff announcements.
US 10-year bond yield (1. 90-day tariff pause, 2. China tariffs lowered from 145% to 30% and 3. Delayed 50% EU tariff) | Source: TradingView
Valuations Leave Little Room for Error
This uncertainty unfolds at a delicate time for markets. The S&P 500's 12-month forward price-to-earnings ratio sits at its highest level in 20 years, while the S&P/ASX 200 closed out FY25 near record forward valuations as well.
Source: Goldman Sachs
Source: Morgan Stanley
These stretched valuations aren't necessarily bearish, but they leave little room for error. With Trump using tariff threats to expedite negotiations, markets must balance optimism about potential trade deals against the risk that current elevated valuations leave little room for disappointment.
