Macroscope | What could force Trump to back down? Markets, if they wake up

Higher inflation, a sharp slowdown or both point to a much bleaker outlook for the US than markets anticipated when Trump won the election

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Traders work on the floor of the New York Stock Exchange on March 5, as Donald Trump appears on a television screen. Photo: AFP

Published: 4:30pm, 6 Mar 2025

George Saravelos, global head of foreign exchange research at Deutsche Bank, does not mince words. Commenting on President Donald Trump’s decisions to press ahead with tariffs on the United States’ largest trading partners and suspend military aid to Ukraine, Saravelos said: “Two pillars of America’s role in the world are being fundamentally challenged: the US’ security backstop for Europe and the respect of rules-based free trade.”

In fact, Saravelos believes the loss of the US dollar’s status as a safe-haven currency “needs to be acknowledged as a possibility”. This is debatable, given the unassailability of the greenback’s position in global finance. Yet Saravelos puts his finger on the worrying level of complacency in markets as Trump unleashes the biggest trade war since the 1930s.

To be sure, the imposition of 25 per cent tariffs on imports from Canada and Mexico – carmakers were exempted from the levies for one month while Canadian energy products face a 10 per cent charge – and an extra 10 per cent on Chinese goods has unnerved markets. The benchmark S&P 500 equity index has dropped 4.9 per cent since hitting a record high on February 19.

Yet this still leaves the gauge slightly above the level it stood at when Trump won the presidential election on November 5. Since then, the risks to the US and global economy, to say nothing about the transatlantic alliance, have increased dramatically. So why the absence of panic in stock markets?

There are several reasons. The most important one is that Trump’s “flood the zone” strategy – causing so much disruption and chaos that it is difficult to assess the consequences of any one policy – has paid off. Even when it comes to markets, which depend heavily on confidence and predictability, there are starkly divergent views about the outlook.

Many investors believe inflation is the biggest risk, mainly because the hard economic data – especially on America’s resilient labour market – is still quite strong, contributing to the stickiness of prices. Trump’s trade, immigration and fiscal policies are expected to drive inflation higher, making it difficult for the Federal Reserve to cut interest rates further.