Global markets tumble amid escalating trade tensions

The new U.S. tariffs on the European Union, China, Canada, and Mexico will take effect this Wednesday, April 2. The American president refers to this date as "liberation day," believing the tariffs will benefit the American economy. Uncertainty is fueled by Donald Trump's weekend statements in which he threatened to impose tariffs on oil from Russia.

Investors are skeptical about the effects of the new tariffs, as seen in stock market reactions. The first to respond were Asian indices. The Japanese stock market experienced a significant drop on Monday. The Nikkei 225 index lost over 1,500 points (about 4-5 percent), falling below 36,000 yen ($239,9). This is the lowest level in about six months.

During Monday's session in Tokyo, almost all companies included in the Nikkei index recorded declines. Particularly hard-hit were semiconductor companies like Renesas Electronics. Companies such as Tokyo Electron and Disco reached their lowest values since last year. Significant losses were also experienced by car manufacturers, including Toyota.

Hirohide Tsuboi, chief strategist for American and Japanese equities at Daiwa Securities, notes that market confidence in the Trump administration is steadily declining, prompting investors to sell off assets. Meanwhile, Hitoshi Asaoka, senior strategist at Asset Management One, points out that "growing concerns about stagflation in the United States have accelerated the flow of capital from the stock market to the bond market."

Oil prices on the New York Mercantile Exchange (NYMEX) have fallen in response to firm statements by U.S. President Donald Trump directed at Russia. The American leader does not hide his dissatisfaction with Vladimir Putin's actions and is considering imposing secondary tariffs on Russian oil.

A barrel of West Texas Intermediate crude for May delivery is priced at $69.06 on NYMEX in New York, marking a decrease of 0.43 percent. Meanwhile, Brent crude on the London ICE Futures Exchange for June delivery costs $73.40 per barrel, noting a decline of 0.31 percent.

In a Sunday interview with NBC, Donald Trump did not hide his anger toward the Russian president. He stated that he is "angry" at Vladimir Putin, particularly because the Russian leader questioned the legitimacy of Ukraine's President Volodymyr Zelensky. The American leader threatened to impose secondary tariffs on Russian oil if a truce is not reached due to Russia's actions.

Market experts remind us that Russia is one of the three largest oil producers in the world. Gao Jian, an analyst at Qisheng Futures Co., notes that "whether 'tariff' is just a strong word or will actually be implemented remains to be seen soon." He also adds that the scale of trade with Russian oil is large, so Donald Trump still needs to consider and evaluate the "pros and cons."

Potential sanctions could particularly affect China and India, which have become key buyers of Russian oil since Russia's full-scale invasion of Ukraine. Any attempt to punish Putin could have far-reaching consequences for the global oil market.

Simultaneously, Donald Trump issued a warning to Iran. In the same interview with NBC, the U.S. president threatened that if Iran does not reach an agreement on its nuclear program, there will be "bombing the likes of which they have never seen before." The American leader also mentioned the possibility of imposing secondary tariffs on countries purchasing Iranian oil.

Iranian President Masoud Pezeshkian rejected the proposal of direct negotiations with the United States regarding the nuclear program. However, he noted that Iran does not rule out the possibility of indirect talks with Washington. It's worth recalling that similar talks have not produced any results since 2018 when Trump, during his first term, unilaterally withdrew the USA from the nuclear agreement concluded in 2015 between Iran and world powers.

In light of President Donald Trump's upcoming decision on a new round of tariffs, Goldman Sachs forecasts that the White House's aggressive actions will cause inflation and unemployment to rise while slowing economic growth almost to zero. The investment bank expects a 15-point increase in tariff rates, which may ultimately be reduced to 9 percentage points through exemptions for selected products and countries.

In a note published on Sunday, Goldman Sachs emphasized that the risk associated with the tariffs announced for April 2 is greater than many market participants had previously assumed. The bank's economists, led by Jan Hatzius, head of global investment research, predict a broad negative impact of the new trade regulations on the economy.

According to analysts, the bank's preferred measure of core inflation (excluding food and energy prices) will reach 3.5 percent in 2025, representing a 0.5 percentage point increase compared to the previous forecast and significantly exceeding the Federal Reserve's 2-percent target. At the same time, weak economic growth is projected—just 0.2 percent annually in the first quarter and 1 percent for the entire year (measured from the fourth quarter of 2024 to the fourth quarter of 2025), representing a drop of 0.5 percentage points from the previous forecast.

Goldman Sachs also foresees an increase in unemployment to 4.5 percent, which is a 0.3 percentage point increase from previous estimates. Overall, the investment bank now assesses the likelihood of a recession in the next 12 months at 35 percent, compared to the previous indicator of 20 percent.

The forecasts point to increasing risks of a stagflationary economy, characterized by low growth and high inflation. The United States last experienced stagflation in the late 1970s and early 1980s. At that time, the Fed, under the leadership of Paul Volcker, drastically raised interest rates, plunging the economy into recession, prioritizing the fight against inflation over supporting economic growth.

However, the economists at Goldman Sachs do not anticipate a similar scenario this time. On the contrary, the bank now expects the Fed to cut its benchmark interest rate three times this year (assuming a quarter-point reduction), compared to the previous forecast of two cuts. Analysts predict that the cuts will occur in July, September, and November, leaving our forecast of the final rate unchanged at 3.5-3.75 percent compared to the current level of 4.25-4.50 percent.

Although the exact scope of the latest tariffs is not yet known, the Wall Street Journal reported on Sunday that Trump is pushing his team to implement more aggressive tariffs, which could mean a 20-percent charge for all U.S. trading partners. Such a move would have an unprecedented impact on the American economy and global supply chains.

Experts at Goldman Sachs note that introducing such high tariffs could trigger retaliatory actions from trading partners, further complicating the economic situation. The uncertainty surrounding the Trump administration's trade policy represents a significant risk factor for financial markets and the economy in the coming months.