Deutsche Bank says looming tariff deadline and this other risk are what investors should care about now

Deutsche Bank strategists advise investors to focus on the potential impact of expiring Trump-era tariffs on July 9 and persistent inflation, rather than the contained market reaction to the Israel-Iran conflict. The expiration of tariffs poses a risk of higher prices, potentially exacerbated by Middle East unrest and its impact on oil prices, which could prevent central banks like the Federal Reserve from cutting interest rates. While geopolitical events are a concern, history suggests markets react more strongly to stagflationary shocks, which are not yet evident in the current crisis unless the Strait of Hormuz closes and drives oil prices above $120 per barrel.

Analysis

Deutsche Bank strategist Henry Allen identifies two primary risks for investors overshadowing the currently contained market reaction to the Israel-Iran crisis: the impending July 9 deadline for the expiration of President Donald Trump’s tariff extensions, which could result in 50% levies on the E.U., and persistent inflation. This inflationary concern is amplified by the prospect of tariff-induced price hikes potentially merging with an oil shock from Middle East tensions, mirroring the 2021-23 experience where seemingly temporary shocks cumulatively increased inflation expectations. Such sustained inflation could compel central banks, notably the Federal Reserve, to delay or abandon planned interest-rate cuts, a scenario viewed as negative for risk assets if driven by sticky inflation rather than by strong economic growth. The market's muted response to recent geopolitical events is contextualized by historical patterns, where significant market downturns were typically linked to stagflationary shocks like the 1970s oil crises or the 2022 Russia-Ukraine conflict, conditions not yet evident as Brent crude remains below its 2024 average of around $80 a barrel. A critical escalation, such as the closure of the Strait of Hormuz, could however drive oil above $120 a barrel, triggering a major inflation shock and impacting global growth. Despite these potential headwinds and other market surprises in 2025, including concerns over AI development and U.S. debt, global markets, evidenced by the MSCI World index reaching new highs, have shown considerable resilience.

Key Decisions for Investors

• Investors should closely monitor the July 9 tariff deadline and its potential inflationary impact, preparing to adjust sector allocations if significant levies are implemented, particularly for E.U.-exposed assets.
• Re-evaluate expectations for central bank interest rate cuts, as persistent inflation, potentially fueled by tariffs or an oil price shock, could lead to a more hawkish monetary policy stance, adversely affecting valuations for growth-sensitive assets.
• Maintain vigilance over geopolitical developments in the Middle East, specifically any threats to the Strait of Hormuz, as a material disruption to oil supply could necessitate a rapid shift towards defensive portfolio positioning and inflation hedges.
• While acknowledging the market's recent resilience against various shocks, investors should remain cognizant that the materialization of highlighted tariff or sustained inflation risks could disrupt this trend and introduce heightened volatility.