Liberation day turned into obliteration day.

In one sense, the new administration achieved what they set out to do: the dollar and oil were down, the cost to this were stocks had their worst day since COVID-19 as investors reacted to the announcement that tariffs ranging between 34% on Chinese goods and 20% on European Union imports would be implemented. Far more draconian than even the worst punters had anticipated. I am sure the administration would have expected this sort of reaction from capital markets. If your company manufactures in China and sells in America, you are at the forefront of Mr Trump’s new initiative. Apple is a perfect example; analysts are already getting their pencils out to cut earnings forecasts.

One can understand part of the rationale for Trump’s actions to a degree as some countries benefit from high tariff barriers, with India and China being good examples. Emerging markets have historically used tariffs to protect their fledgling economies. As a result, America suffers from high government and trade deficits, and these announcements are seen as the start of a process to rebalance within some of these economies. The UK with only 10% was seen to come out of this relatively lightly.

It’s fair to say the market had braced itself to a degree the impact the introduction of additional tariffs could have, but not to the degree of what was announced. Economists raised the probability of an economic recession from odds against to odds on. The list feels almost endless regarding those industries and economies that Wednesday’s announcements will impact.

US traders have increased the odds of an interest rate cut in response to the news, but initially, that feels unlikely. As much as these tariffs will hit the economy, they may well add to the cost of goods, making that 2% target more challenging to achieve.

When the new administration arrived, there was much excitement. While tariffs were part of the agenda, the market focused on the desire to cut red tape and taxes and the hope that this would further drive economic growth. Markets now fear that any initiatives in that direction are unlikely to fully offset the negative impact of Wednesday’s events.

What happens next? Earnings season will soon be upon us, and the numbers announced will now be largely irrelevant. The focus will be on the outlook statements and what company CEOs reveal about the impact the tariffs will have on their ongoing fortunes. Some global leaders have vowed to retaliate, others to negotiate, assuming Mr Trump is willing to negotiate. According to some reports, he is. I guess the question is how much he and the Republican party care about the market’s reaction. History would suggest politicians do care; we shall see. They could see this as short-term pain for long-term gain for the US economy.