UBS analysts are raising concerns that tariffs might be the next disruption for global markets following Monday’s AI stock downturn. As investors were still recovering from the sell-off triggered by DeepSeek, new trade war anxieties are emerging with the Trump administration considering aggressive tariff policies. UBS warns these actions could hit Europe hard, damage U.S.-China relations, and alter global trade rules – but maintains that American stocks might still come out unscathed.
Initially, markets exhaled in relief when President Trump’s initial executive orders didn’t include the feared immediate tariffs. However, that optimism is fading rapidly, akin to a meme stock rally. The Financial Times reports Treasury Secretary Scott Bessent is advocating for universal baseline tariffs starting at 2.5%, with potential monthly increases reaching 20% – a gradual approach intended to apply pressure without causing immediate market panic. This week, Trump reinforced his stance, pledging to impose heavy tariffs on computer chips, pharmaceuticals, and metals “to bring production back to our country.”
The most significant risk lies in U.S.-China relations. Despite Trump’s recent diplomatic gestures towards Beijing concerning a Russia-Ukraine peace deal, UBS anticipates rising tensions. A hawkish group within the administration, supported by Congress’ bipartisan anti-China sentiment, might push for stricter actions. Europe is also at risk. The region’s ongoing trade surpluses and controversial Digital Services Taxes on American tech companies have made it a target.
The recent trade standoff with Colombia illustrates the administration’s tactics. When Bogotá resisted U.S. demands, the threat of significant tariffs quickly led to compliance. UBS suggests “tariff judo” might become a routine strategy, noting that current free trade agreements offer “no protection” against these forceful methods. The legal basis? The International Emergency Economic Powers Act – a 1977 statute often used in modern trade disputes.
In an unexpected twist, UBS remains optimistic about U.S. stocks. The firm sticks to its 9% upside prediction for 2025, relying on America’s economic strength, AI advancements, and declining bond yields to counter trade challenges. “It’s a split-screen market,” an analyst joked. “Tariff concerns in one scene and an ideal economic situation in the other.”
Investors are already adjusting their strategies. Chip stocks faltered on tariff speculations, while U.S. steel producers benefited. The dollar strengthened against emerging market currencies, and Treasury yields decreased due to increased safety investments. “The market is assessing a 40% probability of a full-scale trade war by the third quarter,” a CBOE floor trader observed.
As the tariff situation develops, investors face a difficult decision. Should they ignore the trade war noises and benefit from the AI-driven economic growth? Or prepare for possible supply chain disruptions? Currently, the VIX indicates complacency – yet, as any seasoned investor knows, trade wars can transform whispers into loud alarms.
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