Investors Seek TACO Trade Amid Trump’s Past Tariff Threats
As tensions rise between the U.S. and Europe, investors are adopting caution amid fears of new tariffs. The volatility index, VIX, surged by 27% over five days, marking its peak since the sweeping tariff announcements in April last year.
Tensions Rise Amid Tariff Threats
President Trump’s threats suggest that several European nations could face tariffs soon unless they support America’s controversial interest in buying Greenland. This territory is currently governed by Denmark, a NATO ally that has no plans to sell.
Market Reactions and Global Implications
As U.S. markets remained closed for the Martin Luther King Jr. holiday, European indices reflected mounting anxieties. Key market downturns included:
- Germany’s DAX: down 1.57%
- London’s FTSE: down 1.4%
- France’s CAC 40: down 1.2%
Asian markets also felt the impact, with Tokyo’s Nikkei 225 and Hong Kong’s Hang Seng Index declining by 1.11% and 0.29%, respectively. Futures indicated a potential dip of 1.75% for the S&P 500.
The Emergence of the “TACO” Trade
Investors recall ‘Liberation Day,’ a reference to Trump’s April 2 address that caused a sharp market decline. The term “TACO,” which stands for “Trump Always Chickens Out,” underscores a belief that Trump may retract his tariff threats, based on past experiences.
Analysts at Deutsche Bank believe that the legal validity of Trump’s tariffs could be tested soon by the Supreme Court, which may limit his flexibility in future negotiations. They noted that “the market has been burnt before” by overreactions to tariff threats.
Mixed Investor Sentiment
UBS’s chief economist Paul Donovan emphasized the continuing focus on U.S. bonds, which reacted moderately to Trump’s recent rhetoric. Despite threats of tariffs, bond investors remain skeptical about their actual implementation.
Market sentiment appears divided regarding the likelihood of tariffs. Data from Polymarket reveals that:
- Only 17% believe the proposed tariffs against Europe will take effect on February 1.
- Forty percent predict any tariffs will begin within two weeks.
Political Considerations Ahead of Midterms
With midterm elections approaching, political polling indicates declining support for Trump. A Quinnipiac survey highlighted that 90% of Americans oppose forceful acquisition of Greenland, while only 17% support his approach.
Despite the mixed sentiment, there is a cautionary note for investors. Trump’s awareness of stable market behaviors could embolden him to proceed with threatened tariffs. Historical data illustrates that a strong market response can paradoxically lead to increased confidence in implementing tariffs.
As geopolitical factors continue to evolve, stakeholders must remain vigilant and informed about potential shifts in trade policy.
