Tariffs Ripple Through Global Markets: Impact on Australia and Beyond
Tariffs imposed by US President Donald Trump are not surprising, but they have triggered a significant shock in financial markets worldwide. The Australian share market plummeted at the opening of trade on Monday, and US stock futures are off over 2%. Analysts suggest this may be an overreaction, given China’s relatively mild 10% tariff, but following recent record highs, a pullback was due.
“Expect more volatility as the tariffs unfold.”
The Tariff Fallout
The trade tension is high stakes, with the US doing $US1.6 trillion in business with China, Canada, and Mexico. Canada retaliated with tariffs on $US170 billion in US goods. Mexico remains uncertain in its response, while China is preparing to take the US to the World Trade Organization.
Investors are starting a “de-risking phase,” pulling money out of stocks and cryptocurrencies, and moving to USD and gold for safety. Jessica Amir, market strategist at MooMoo Australia, highlights this shift in investor behavior.
Implications for Australia
The global trading drama is particularly concerning for Australians nearing retirement, worried about superannuation balances. Experts describe this event as a “risk-off” phase, where global share markets, already vulnerable, face significant risks of a major downturn.
Despite these challenges, big superannuation firms like AMP predict overall positive equity market returns for 2025, anticipating a recovery in the second half. AMP’s Shane Oliver forecasts a modest 7% return, with a 15% correction likely due to stretched valuations, recession risks, and geopolitical issues.
“But central banks still cutting rates with the RBA joining in, prospects for stronger growth later in the year supporting profits, and Trump’s policies ultimately supporting US shares, should still mean okay investment returns.”
Betshares chief economist David Bassense agrees a share market correction is likely, amplified by the new tariffs.
“Global equities are facing an onslaught of challenges at present…The near-term outlook is messy to say the least and the risk of deeper correction in equity markets has escalated.”
The Australian Dollar
The Australian dollar could suffer further declines in this risk-off environment. A weaker AUD against the EUR and USD impacts travelers and importers adversely.
“The Aussie dollar is suffering renewed collateral damage from Trump’s trade war,” says Sean Callow, InTouch Capital Markets senior FX strategist.
“While Australia is an unlikely target for tariffs near term, the tariffs on major economies risk hitting the brakes on global growth.”
Callow predicts the AUD may break 61 cents, a new low since April 2020.
EY’s chief economist Gregory Daco warns of potential economic shock, suggesting it could push the US into a recession, trigger stagflation, and create financial market volatility.
Will Australia Face Direct Tariffs?
Australia has a trade deficit with the US, meaning more US victories in trade. The Australia-United States Free Trade Agreement (AUSFTA), entered into force in 2005, ensures 97% of non-agricultural exports from Australia to the US are duty-free, with three quarters of agricultural tariffs eliminated. Two-way trade grew from $US32 billion to $US77 billion post-AUSFTA.
However, Mr. Trump’s erratic trade policies complicate predictions. Foreign affairs and experts suggest there are no guarantees about future trade actions.
“I’ve been talking to people all around the world, and there’s nothing you can do but guess with this guy.”
Bassense notes that the current round of tariffs may have a bigger impact on US prices than in 2018-19, representing a 5x increase in the average effective US tariff. Additionally, Trump views tariffs as a means to fund tax cuts rather than a temporary negotiating tactic.
EY economist Cherelle Murphy adds that while direct impact is unlikely, sectors like mining, which rely on Chinese manufacturing inputs for US-bound exports, could be indirectly affected.
“We have a number of manufacturers in Australia which of course import materials from China and sell the finished products onto the US, so we could be taxed effectively on those.”
Furthermore, Australia’s reliance on China for demand exacerbates risks.
Interest Rates
The tariff developments could push interest rates upwards due to inflationary pressures. Increased import costs trigger retail price hikes, boosting inflation.
Based on money market pricing, there is a high probability the RBA will cut the cash rate to 4.1% in February. However, these predictions may shift if these developments pose a material risk to global inflation.
“There will be some very worried faces at the RBA board meeting this month.”
In the US, forecasts for interest rate cuts are being revised. Capital Economics’ Paul Ashworth warns of a larger, faster surge in US inflation, closing the window for further rate cuts.
As the financial markets navigate through these turbulent times, staying informed is crucial. Join the conversation, subscribe to our updates, and share your thoughts on how these tariffs might impact the global economy and our portfolios.
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