By Mike Dolan

LONDON (Reuters) - What matters in U.S. and global markets today

By Mike Dolan, Editor-At-Large, Financial Industry and Financial Markets

If you thought a global trade war was already priced into world markets, Thursday’s reaction to the U.S. tariff sweep will be sobering.

I’ll get into all the details below and explain why this is just the beginning of what could be a very difficult ride.

Today’s Market Minute

* President Donald Trump’s move to impose sweeping tariffs on U.S. imports from allies and rivals alike sparked threats of retaliation on Thursday.

* Markets are reeling after the new tariffs sent shockwaves through the financial world, with the dollar and U.S. stocks among the hardest hit on fears that a broadening trade war will unleash a recession.

* "All this work for nothing." Trump’s global tariffs are creating an all-round blockade that is hurting Chinese businesses, large and small.

* This latest round of tariffs will sap yet more vigor from a world economy that has barely recovered from the post-pandemic inflation surge and is weighed down by record-high debt and unnerved by geopolitical strife.

* He calls it "Liberation Day", but Trump’s gamble on global tariffs could cause political headwinds for his party and economic pain for his constituents if his promises to recast the economy do not work out.

Trepidation Day

Some thought Wall Street would embrace the much-hoped for clarity offered by Trump’s tariff announcement, but they were wrong. Wall Street stock futures have plummeted more than 3% overnight on the combination of a 10% universal tariff on all U.S. imports and reciprocal tariffs on top of that for many countries, heavily concentrated in China and Asia. China now faces a combined 54% tariff rate when factoring in earlier moves.

European Union imports are set to be hit with 20% tariffs, with 24% planned for Japan and 10% for Britain. Canada and Mexico are not currently subject to reciprocal tariffs because Trump’s prior 25% fentanyl and immigration-related tariffs will stay in place.

The moves appear to have been decided using relatively crude calculations of goods trade deficits with the United States, something that rankled many investors given the amount of time taken to construct the plan.

Countries affected around the world said they would now examine retaliatory measures, with the EU proposing its own tariffs. There are also reports suggesting the bloc is considering additional fiscal supports for the worst-affected sectors.

Overall, Deutsche Bank estimates the average tariff rate on U.S. imports could now rise to 25-30% - the highest in more than 100 years and above most expectations.

Stock and bond markets reflected investor concerns about the tariffs’ potentially damaging impact on U.S. and world growth.

S&P futures were down 3.1% ahead of Thursday’s open, with futures on the Russell 2000 down over 4%, worse than the 2.7% hit in Tokyo and the losses of more than 1% in Europe and Hong Kong.

The VIX ’fear index’ of Wall Street stock volatility climbed three points to 26, back to levels seen a month ago when U.S. stocks were falling sharply.

Treasury yields plummeted, with the 10-year down about 15 basis points to 6-month lows, testing 4% at one point.

But currency moves were less intuitive, with the dollar tracking Treasury yields to slide to its lowest since October. It eyed its biggest one-day hit since 2023.

This was somewhat surprising given that tariffs were expected by many to be more damaging to overseas economies, which would typically lift the dollar. Several reasons have been suggested for this move.

One is that the American economy may feel a bigger initial hit than the rest of the world due to the scale of the new average U.S. trade barriers, especially if fiscal measures abroad kick in alongside retaliatory tariffs. That’s lifted the euro.

Another is a dash for the yen’s ’safe haven’ status. And Canada’s dollar and Mexico’s peso also rose on the assumption that they have escaped the worst-case scenario for now. China’s yuan was weaker, but that was limited by state bank buying and officials setting the onshore reference rate higher.

The dollar’s losses may also simply be due to the fact that foreign investors in U.S. assets are resuming their exit from America’s markets, which we saw in the first quarter.

In other news, Tesla (NASDAQ: TSLA )’s stock overnight lost most of Wednesday’s 5% gains that were based on reports that its boss Elon Musk would soon step back from his government advisory role, reports Musk and the White House dismissed.

I’ll now turn back to today’s main story and discuss why the much-heralded "Liberation Day" announcement has liberated no one from uncertainty.

The real tariff uncertainty starts now

Whatever you make of the sweeping tariff plan U.S. President Donald Trump dropped on Wednesday, remember that the real uncertainty about the potential economic damage only starts now.

Relief at getting some clarity on Wednesday was understandable. But we still have no hard evidence of just how these measures will directly affect corporate and household decision-making, or exactly how countries will retaliate.

And Trump’s tariff strategy is clearly to keep everyone guessing about the eventual targets, the size of the levies and the duration.

Indeed, the White House has already factored in more uncertainty, with Trump and his officials acknowledging that the road ahead will be bumpy. So the idea that the fog will all dissipate in weeks or even months seems hopeful at best.

While there aren’t many overarching measures of "uncertainty" per se, the ones that relate to U.S. trade are off the charts.

Before Wednesday’s big reveal, there was a huge spike in the U.S. trade component of the Economic Policy Uncertainty Index, which is based on the news sentiment model devised by Baker, Bloom and Davis. It is currently reflecting the discombobulation many CEOs, business leaders and families are feeling when planning large purchases.

The measure was already at a record high in February, exceeding the peaks of the first Trump term. But the March reading saw it more than double over the month - to more than twice the 2019 peak and almost 30 times the level recorded just before last November’s election.

The market fallout has been slightly less hyperbolic, but still saw Wall Street’s worst start to the year since the pandemic.

It’s possible the trade uncertainty gauge might drop a bit now that details of Trump’s plans have emerged. But so much is still unknown that it’s hard to see the index returning to normal levels anytime soon.

Because even if you think Trump’s goals are a long-term positive, by wringing trade concessions overseas and returning factory jobs to America, it could take years to achieve that and painful adjustments in the interim.

What investors are now trying to do is gauge the immediate impact, any potentially offsetting U.S. policy actions and the reactions of governments abroad.

BADLY DRAWN

For many U.S.-based money managers, including long-bruised ’value’ investing funds that have enjoyed a rare cheer this year, not much draws them back to U.S. stocks as Trump pushes ahead with plans to reorder the global trade landscape.

The latest investment letter from Boston-based GMO’s Ben Inker and John Pease was scathing about the tariff policy.

They remained fretful about the outlook for expensive U.S. stocks, while showing particular disdain for corporate ’junk’ debt that’s still offering historically low risk premia. They also developed a rule-of-thumb that the dollar should appreciate by about a third of the overall tariff increases, absent overseas retaliation.

"While it might seem like the current period of uncertainty should end quickly once the administration finalizes their proposals, the poorly designed nature of many of these policies makes it hard to have confidence that they will last in their current form," they wrote.

They cited copper tariffs as an example of how the whole scheme could rebound and potentially crater U.S. returns and investment without achieving the mooted goals.

"Taking the goal of increased domestic production of copper as a given, imposing a large tariff on imported copper now seems an inefficient and costly way to achieve it," they said. Copper mines take years to develop before they can produce any metal. In the meantime, all that happens is that the cost of copper in America rises substantially higher than elsewhere in the world.

They acknowledged that substantial tariffs on copper imports may incentivize investment in U.S. copper mines, but only if those tariffs are expected to last. A mine could run for decades, so uncertainty about the duration of the tariffs will reduce the incentive to invest today, they said. Another disincentive would be the risk that a future administration removes the tariff or perhaps offers subsidies instead.

"A big part of the problem with badly designed policies is that they are less likely to stick even when enacted with great fanfare."

Overall, Inker and Pease see rough times ahead for U.S. markets, arguing that the combined impact of tariffs, a stronger dollar, and weaker consumption is a net negative for the average U.S. stock.

"Tariff risk, piled on top of the notoriously high valuations of U.S. companies, makes the American stock market a hard pitch," they concluded. "And yet you could do worse. All you would have to do is buy some U.S. corporate credit."

So much for American exceptionalism.

Chart of the day

The heat map of where the Trump tariff sweep will hit is clearly hottest in Asia. Not only does China face a combined levy on its goods of 54% - close to the 60% Trump promised in his election campaign - but many so-called "China+1" countries, who had benefited from re-routed Chinese trade to America, are now being heavily hit as well. Vietnam faces 46% levies, Thailand 36%, South Korea 25% and India 26%. Importantly, many U.S. firms also manufacture goods in these countries. For example, Nike (NYSE: NKE ) produced 50% of its footwear and 28% of its apparel in Vietnam in its 2024 financial year.

Today’s events to watch

* U.S. March layoffs, weekly jobless claims, February international trade balance, March service sector surveys from ISM and S&P Global; Canada February trade balance

* Federal Reserve Vice Chair Philip Jefferson and Fed Board Governor Lisa Cook speak; European Central Bank Vice President Luis de Guindos speaks

* U.S. corporate earnings: Exxon Mobil (NYSE: XOM ), Lamb Weston, Conagra Brands (NYSE: CAG )

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(By Mike Dolan; Editing by Marguerita Choy)