Trump’s crisis is only beginning. It will make you question everything
The issue that really matters for markets and the world right now is: do Donald Trump’s actions mean America is no longer the safe haven it’s been for decades?
16 April 2025
When Jo Masters arrived in Los Angeles in January, it took her 2½ hours to clear immigration. Last week, it took Barrenjoey’s chief economist just 25 minutes – and the drivers on the ground were complaining long and loud about the lack of travellers, and poor forward bookings.
While Masters says you can’t yet see the impact of US President Donald Trump’s tariff war on the ground in America, you sure can feel it.
You can feel it in the way investors are nervously working through the ramifications of a trade war that keeps changing every day. In the way business leaders seem paralysed by uncertainty. In the way managers are talking about a coming wave of “reductions in force”, the polite American term for redundancies.
Masters, who arrived back home on Tuesday, says she was shocked to be asked a particular question time and time again. “People would ask me, ‘how much are we hated by the rest of the world right now?’”
At any other time, such a query might seem amusing. But for Masters, it goes to the heart of the only question that really matters for markets and the world right now: do Trump’s actions mean America is no longer the safe haven it’s been for decades?
“If that’s no longer true, then everything you believe has a question mark over it,” she says bluntly.
For as long as anyone in markets can remember, the 10-year US Treasury yield set the global price of money, and the US dollar enjoyed unquestioned status as the world’s reserve currency. But if America can no longer be fully trusted after Trump’s tariff shock, then everything – the cost of money, every stock and bond, every currency – may need to be repriced to reflect a higher level of risk.
Even Wall Street titans such as JPMorgan chief Jamie Dimon are getting nervous about the damage the uncertainty created by Trump could do to America’s credibility. “We should be careful. I don’t think anyone should assume they have a divine right to success and therefore don’t worry about it,” Dimon told the Financial Times on Tuesday night.
Exhausted investors have enjoyed a period of relative calm on equities markets this week following the stunning gyrations that followed Trump’s “liberation day” announcement – the savage falls in Wall Street’s S&P 500 and Australia’s ASX 200, then the partial recoveries following the announcement of a 90-day pause in the introduction of all tariffs other than those on China.
Some investors are growing increasingly convinced– or at least hopeful – that the worst has passed, even if more volatility is inevitable as the world waits to see what trade deals can be struck in the next few months, and how the trade war with China develops. Social media is full of financial analysts trumpeting the lessons of past market crashes, which invariably suggest major corrections are typically the best time to buy.
Perhaps that will turn out to be true again. Investors certainly hope so; figures from Deutsche Bank’s global head of FX research, George Saravelos, show that foreigners own $US7 trillion of American fixed income (which has doubled since 2010) and $US18 trillion of American equities (up six-fold since 2010).
But hopes that the worst has passed ignore the fact that Trump and his team have come to power with a big prize: rewiring the entire global economy to favour America, and contain China. The fracturing and fragmentation of global trade that Trump wants is probably only just beginning.
As former US treasury secretary Larry Summers told The New York Times this week: “Anybody who thinks the genie is back in the bottle and that it’s all now OK should reconsider their position.”
Wall Street equities have gently risen this week, as the undercurrent of Trump’s near-constant tariff talk suggests the supposed master negotiator is backing off, even without securing concessions.
Following last week’s grand tariff pause, the weekend brought the announcement of exemptions for smartphones and computer chips from the 145 per cent tariffs on China. Then on Monday night, Trump suggested he might give US car makers some exemptions from the 25 per cent tariffs imposed on the auto sector. There’s still plenty of bluster and tough talk from Trump, but the direction of travel does seem clearer, and more comforting.
Of course, the idea that Trump may be able to negotiate dozens of trade deals in the next 90 days is obviously silly, and so the uncertainty that is paralysing markets and business communities across the globe is unlikely to lift. Regardless of how the next three months go, it’s hard to see how the fractures to global trade can be quickly repaired.
The possibility that these trade negotiations drag on for months remains very real. The potential for Trump to force apparently friendly neighbours into deals that require them to push trade barriers higher – against China, for example – remains very real, and particularly worrying for a nation such as Australia, which sends 35 per cent of its exports to the Asian giant. And the prospect that Trump actually follows through with the tariffs threatened on “liberation day” cannot be discounted.
Any of these outcomes would mean a further fracturing of global trade. Even if we end up with an average US tariff rate of 20 per cent – rather than 30 per cent or more – that’s still a very different world to the 3 per cent tariff rate we ended 2024 with. And there’s a real question as to whether markets have fully priced in that hit.
The other way to read Trump’s tariff pause is that he is narrowing the focus of his trade war to take aim at his biggest target.
“President Trump is attempting to change the global order of China using cheap labour to produce goods which are exported to US consumers who collectively pay for the goods through debt which is funded by China through the purchase of US-denominated bonds,” says Perpetual’s head of investment strategy, Matt Sherwood.
The idea of the world superpowers effectively shutting down trade with each other is frightening.
But Sherwood is right when he says Trump’s goal represents “a major economic re-alignment the likes of which has not been attempted in over 50 years”.
And this is surely the key message of the past two weeks. The gyrations on financial markets have certainly made for great drama, but at their core they show how investors are trying to reprice in real time the fundamental shift from a world of globalisation, free and easy trade, relatively low risk and rising asset prices, to a world of fragmentation, protectionism and uncertainty.
As Summers points out, this is not like other crises, which have typically been caused by something bad happening in the world – a financial bubble, for example, or some sort of exogenous shock. Instead, Summers says, “this one is self-inflicted” – that is, Trump is very deliberately trying to rewire how the world works.
It’s for that reason the recent moves in currency and bond markets are being watched so closely for signs that Trump’s actions have caused a loss of trust in US denominated assets.
As has been well canvassed, it was the sudden spike in the benchmark 10-year US Treasury yield – the most watched interest rate in the world – from 3.99 per cent on April 4 to 4.2 per cent on April 7 that forced Trump to hit the pause button on his tariff plan.
But the tensions in America’s $US29 trillion ($45 trillion) bond market haven’t gone away. Yes, the 10-year yield has retreated recently to 4.3 per cent, from its recent peak of 4.9 per cent on April 11. But new data from the Federal Reserve Bank of New York showed that the term premium in US Treasuries – the extra return investors require to hold longer notes over shorter ones – has reached levels not seen in 11 years.
Term premiums rise when US economic policy becomes harder to predict. The combination of Trump’s proposed tax cuts, plans in Congress to increase the US debt limit and tariff uncertainty is clearly adding to the view that America can’t be trusted in the way it could four weeks ago.
“If the United States isn’t credible, that makes the whole financial system less stable,” Summers says.
Marko Papic, chief strategist at BCA Research, is taking comfort from the fact Trump has at least pulled back from the cataclysmic threat implicit in the “liberation day” announcement: severing the US economy from the rest of the world.
“Clearly, he is negotiating,” Papic says.
He agrees the prospect that Trump can hammer out a huge number of trade deals in 90 days is “patently ludicrous” but argues “that makes the deals more likely to happen, not less. They just will not be comprehensive deals that change the gravity of global trade.”
Maybe. But Macquarie strategist Viktor Shvets says investors should continue to brace for chaos.
For starters, tensions around trade are not going away, even if Trump gets his swath of deals, because there’s little chance the administration’s goals will be met.
America’s current account deficit won’t meaningfully shrink. Manufacturing is not going to suddenly return to the US. And China will keep trying to find ways to skirt around whatever trade restrictions are imposed on it. This will allow Trump to keep claiming that America is being ripped off, and so “even though the peak of initial shock may have passed, there will be regular flare-ups, on national and industry basis”, Shvets says.
“It’s not hard, Shvets says, to see the world of trade and capital splitting into blocs.”
These are already becoming evident in small ways, and big ones – China’s ban on rare earth exports to the US are a good example, as is its reported decision to prevent Chinese airlines from buying planes and parts from Boeing.
Shvets also sees the trade tensions shifting to services. “We are likely to be at only the beginning of a potential rupture in services and how countries and blocs address questions of data, licence fees and royalties, intellectual properties rights.”
From there, it’s not hard to see the fracturing of global trade in goods and services spilling over into what Shvets calls the “deglobalisation of capital flows. Investors are likely to witness proliferation of capital controls, attempts at de facto defaults as well as establishment and/or expansion of wealth funds, dedicated to satisfying perceived national objectives. Such a world might also demand elimination (or at least curtailment) of central bank independence, including the Federal Reserve’s.”
It’s also not hard, Shvets says, to see the world of trade and capital splitting into blocs. And while he doesn’t expect there will be many takers for a China-led bloc, support for an American-led bloc will be tempered by the Trump administration’s suddenly antagonist attitude towards the rest of the world.
The other problem for investors hoping for a return to the relative calm they knew just six months ago is that there are no easy answers to the inequalities that have brought Trump and other populists to power. The natural state of populists, Shvets argues, is chaos rather than coherence, and the early months of this new Trump administration have underscored their ability to embrace seemingly contradictory ideas. They want both protectionism and free trade. They want to ensure tax cuts, but are now talking about higher taxes on wealthier Americans. They want cuts to government spending and subsidies for certain groups. And perhaps most notably, they want to celebrate the primacy of the private sector while also increasing intervention in the economy and society.
Shvets argues Trump’s own unruly trio of support from “globalist tech titans, parochial national-nativists and traditional Republicans” will be particularly difficult to satisfy, and so the rolling dramas will be inevitable.
If Shvets is even half right about the world we are heading towards, the challenges for investors, policymakers, business leaders and regulators will be immense.
How does an investor value the shares of globally exposed businesses such as BHP and Rio Tinto, when you can’t be sure which nations will be allowed to buy the commodities they produce?
How does a board give the green light to a new plant, a new product or an expansion project if they can’t be sure they will still be able to access certain key markets?
How does a central bank on a small, trade-exposed island that is reliant on foreign capital flows set official interest rates?
How do future Australian governments navigate between their vital security alliance with the United States and their vital trade alliance with China? While Labor and Liberal are busy using Trump to score political points in the federal election campaign, this challenge is going to get very real, very quickly for the next government.
The gloomy picture painted above raises an obvious question: are there any guardrails that can keep Trump in check, and prevent the fractures to global trade and financial markets?
As we’ve already seen, bond markets and currency markets can play an important role in tempering Trump’s plan, and for all the growing concerns about the safe-haven status of the US, it’s hard to see what the alternatives might be. The US might be a particularly imperfect union right now, but it is still home to the world’s most innovative companies, the world’s deepest and broadest capital markets, and its largest economy. Investors may need to rethink the risk premium they place on America, but they won’t turn their backs on it.
Perhaps the other handbrake on Trump is politics and power. Papic says his intelligence in Washington suggests a “specific tech entrepreneur with a lot of pull in the current administration (not Elon Musk) is heavily involved in mapping out the future. Particularly in directly interviewing candidates for the intelligence and military jobs.”
Make of that what you will. But if nothing else, Papic argues it’s a reminder that Trump’s “various backers are not thinking of a ‘one-and-done’ term”, even if the president himself can’t run again.
“There is a lot at stake for a number of powerful stakeholders. Stakeholders who are not going to want to see a deep recession, a Democratic Party sweep in the midterms, or the S&P 500 at 4000 points.”
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