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Equities and bonds both rallied on Thursday after US President Trump directed his administration to evaluate reciprocal tariffs, but he stopped short of imposing immediate measures.

The directive instructs the US Trade Representative and Commerce Department to develop country-specific import taxes, factoring in non-tariff barriers such as value-added taxes (VATs), subsidies, currency policies, and digital services taxes. However, the process could take weeks or months, with no set timeline for implementation.

Trump cited European VAT policies as an example of unfair trade practices, while a White House official pointed to Japan and South Korea as potential targets. Developing economies with higher tariffs on US products are also likely to be affected. Unlike his 2024 campaign proposal for a universal import tax, this approach appears more tailored but leaves room for broader action.

For now, the delay in implementation limits the immediate market impact, but the risk of retaliation remains. If negotiations stall, the EU, Japan, and South Korea could respond with countermeasures, adding to trade uncertainty, inflation pressures, and market volatility.

Following the news, the S&P 500 rose 1% and 10-year Treasury yields fell 9 basis points on Thursday, as markets rebounded from Wednesday鈥檚 sell-off driven by the consumer price index (CPI) release, reassured by the lack of immediate action. Markets also appeared to have a dovish read on Thursday鈥檚 producer price index (PPI) report, as core PPI, which excludes food and energy, rose 0.3%, in line with consensus estimates, with price gains concentrated in energy and food rather than reflecting broad-based inflationary pressures. On Friday, Chinese equities extended their recent rally, though regional indices saw mixed performance with Japanese equities slipping on a stronger yen.

What do we think
Markets found relief following the announcement. Wednesday鈥檚 CPI data led to a sell-off as investors scaled back expectations of rate cuts, but markets rallied on Thursday as they processed that Trump鈥檚 directive does not impose tariffs immediately. The delay suggests this could be a negotiation tactic rather than a firm commitment, similar to how Trump previously used tariff threats to extract trade concessions from Mexico, Canada, and Colombia. That said, the prospect of higher duties on autos, semiconductors, and pharmaceuticals still adds to trade uncertainty.

While these were just threats, threats lead to negotiation. The EU preemptively offered to cut tariffs on US cars, hoping to avoid escalation and protect its struggling auto industry. Bernd Lange, head of the European Parliament鈥檚 trade committee, said the bloc could lower its 10% tariff closer to the US鈥檚 2.5% rate as part of a broader deal that includes increased LNG and military equipment purchases. European automakers support the move, while EU officials believe that existing tariffs on Chinese EVs will prevent a flood of imports. If talks fail, Brussels is prepared to retaliate against US tech and financial firms using new trade enforcement tools designed after Trump鈥檚 first term. Following an in-person meeting with India鈥檚 prime minister, Trump said the two countries would seek to reduce 鈥渧ery high鈥� Indian tariffs on US goods and strike deals for the purchase of US oil, gas, and combat aircraft.

Our base case is a scenario of 鈥渟elective tariffs.鈥� We do not expect sustained blanket universal tariffs but rather targeted measures and negotiation-driven outcomes. Highly aggressive US tariffs would almost certainly trigger retaliation by US trading partners, and there are risks of a tit-for-tat ratcheting up of measures. Markets will be watching closely for any shifts toward full enforcement, as a broad implementation of tariffs would raise inflation risks and likely weigh on equities, and have the potential to dent, but not derail, US economic growth.

How do we invest

Navigate political risks. The latest tariff directive from the Trump administration introduces heightened uncertainty in global trade, reinforcing the need for portfolio diversification and hedging approaches, in our view. In equities, capital preservation strategies can help manage downside risks. As volatility and skew are low relative to current levels of uncertainty, mean reversion strategies can also be an effective way to harness higher volatility. We like high grade and investment grade bonds, as they offer some insulation against uncertainty and can help diversify portfolios. Separately, we believe long USDCNY could be an effective hedge against trade risks, while CAD and MXN long exposure should be hedged or avoided in the near term. Gold also remains an effective hedge against geopolitical and inflation risks, in our view. For investors willing and able to manage risks inherent in alternatives, we also think certain hedge fund strategies are well positioned to offer attractive risk-adjusted returns and portfolio resilience during market volatility.

More to go in equities. Despite the administration鈥檚 push for reciprocal tariffs, we expect market resilience, particularly in US equities, as economic growth remains intact. We will continue to monitor trade policy closely. Tariffs on Canada and Mexico are unlikely to be sustained, US economic growth should represent a tailwind for stocks, and we continue to believe that AI presents a powerful structural tailwind for earnings and equity markets. Our base case remains for the S&P 500 to rise to 6,600 by year-end.

Harvest currency volatility. The reciprocal tariff framework and continued uncertainty around trade negotiations are likely to fuel currency volatility, providing an opportunity to use volatility spikes to boost portfolio income. Over the next one to three months, and while trade uncertainty remains particularly elevated, we like picking up yield by selling the upside in the EURUSD and downside in the USDCHF. Over the next six months, we like selling the upside in the CHFJPY, the EURGBP, and the EURAUD, and the downside in the GBPUSD, the GBPCHF, and the AUDUSD. While the US dollar has room to strengthen in the near term, we expect it to give up its gains over the balance of 2025.

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