FTSE flat but Nasdaq surges as markets weigh Trump tariffs being declared illegal

A US Court ruling declared several of Donald Trump's trade tariffs illegal, citing Presidential overreach, leading to a muted reaction in European stock markets but a surge in US futures as investors weigh the implications. The ruling, which the Trump administration is appealing, has created uncertainty regarding future tariff policy and its impact on funding Trump's tax cuts, potentially widening the budget deficit and pressuring the bond market. Analysts expect the case to reach the Supreme Court, with the potential for the tariffs to be reinstated or replaced, while some suggest the ruling could provide Trump with a face-saving exit from his tariff approach.

Analysis

The US Court of International Trade's ruling declaring certain Trump administration tariffs illegal has introduced significant market uncertainty, evidenced by a muted reaction in London where the FTSE 100 fell 0.1%, contrasting with gains for European exporters like Adidas and Daimler, and a notable surge in US futures, with the S&P 500 and Nasdaq indicated to open 1.2% and 1.7% higher respectively. Analysts, including AJ Bell's Russ Mould, view market gains as "measured" due to skepticism over the ruling's ability to definitively alter Trump's trade policy, an outlook reinforced by the administration's immediate appeal. Barclays' Ajay Rajadhyaksha anticipates a 4-8 week period of "tariff policy limbo" and doubts the ruling will prompt Trump to abandon his tariff strategy, predicting the legal challenge will likely reach the Supreme Court. Panmure Liberum's Joachim Klement suggests the decision could be overturned there under the Unitary Executive Theory, or that Trump could reimpose tariffs via Section 301 of the 1974 Trade Act. Crucially, the ruling impacts the funding mechanism for proposed tax cuts, as tariff revenue was a planned contributor; its potential loss, as Klement notes, could widen the budget deficit and negatively affect US Treasuries. It is important to recognize that this ruling does not affect all tariffs; those on steel, aluminum, autos, and semiconductors, imposed under the Trade Expansion Act, remain in place. The development has pressured global bond yields upwards, with US bonds particularly affected, and initially strengthened the US dollar due to the unwinding of 'sell dollar' tariff trades, though XTB's Kathleen Brooks suggests sustained yield rises could eventually pressure the dollar. The muted rally in UK stocks, despite rising oil prices, might indicate a disadvantage for countries with recent US trade deals if these specific tariffs are ultimately reversed.

Key Decisions for Investors

• Investors should prepare for heightened market volatility and policy uncertainty for at least 4-8 weeks as the legal appeals process concerning US tariffs unfolds, closely monitoring developments related to the Supreme Court appeal and potential alternative tariff measures.
• Particular attention should be given to US Treasury yields and the US dollar, as the evolving tariff situation could significantly influence US fiscal forecasts, budget deficit concerns, and currency market dynamics, potentially leading to increased pressure on bond valuations.
• Re-evaluate exposures to sectors sensitive to international trade and tariffs, recognizing the ruling's limited scope—many significant tariffs remain—and exercising caution regarding the sustainability of the initial positive US market reaction given the anticipated prolonged legal and political maneuvering.