Asian indices plunge amid escalating US tariff threats

This coming Wednesday, 2 April, new tariffs imposed by the USA on the European Union, China, Canada, and Mexico will come into effect. The American president has described this date as "Liberation Day," as he is convinced that the tariffs will bring benefits to the American economy. Weekend statements by Donald Trump, in which he threatened to impose tariffs on oil from Russia, are also fuelling uncertainty.

Investors are currently sceptical about the effects of the new tariffs, as seen by the reaction of the stock exchanges. The first to react were the Asian indices. The Japanese stock market experienced a marked decline on Monday. The Nikkei 225 index lost over 1,500 points (around 4-5 percent), falling below the 36,000 yen level. This is the lowest level in about six months.

In Monday’s session in Tokyo, almost all companies within the Nikkei index recorded declines. Shares in semiconductor sector companies, such as Renesas Electronics, were particularly hard hit. Tokyo Electron and Disco shares reached their lowest values since last year. Car manufacturers' shares, including Toyota's, also suffered significant losses.

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

After the Asian stock exchanges, European ones reacted. WIG20 started its trading in the red, affecting major companies — including KGHM, PZU, and mBank.

The German stock exchange also began the week on a negative note. The DAX index recorded a decrease of over 1 percent, weighed down by the performances of BASF, Commerzbank, and Infineon — all down by about 3 percent. Investors in France started the new week with a similar sentiment, with the CAC index also experiencing significant losses.

Oil prices on the New York fuel exchange fell in response to Donald Trump’s strong statements directed at Russia. The American leader has made no secret of his dissatisfaction with Vladimir Putin's actions and is considering introducing secondary tariffs on Russian oil.

A barrel of West Texas Intermediate crude for May delivery is priced at 69.06 USD (£53.37) on the New York NYMEX, a decrease of 0.43 percent. Meanwhile, Brent crude for June delivery costs 73.40 USD per barrel on the London ICE exchange, recording a decline of 0.31 percent.

In a Sunday interview with NBC, Donald Trump did not hide his anger towards the Russian president. He stated that he is "very angry and pissed off" with Vladimir Putin, particularly in the context of the Russian leader questioning the legitimacy of Ukrainian President Volodymyr Zelensky. The American leader threatened to impose secondary tariffs on Russian oil if a truce is not reached due to Russia's fault.

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

Any 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 fuel market.

Simultaneously, Donald Trump issued a warning to Iran. In the same NBC interview, the US president threatened that if Iran does not agree to a deal regarding its nuclear programme, it will face the bombings of "the likes of which they have never seen before". The American leader also mentioned the possibility of imposing secondary tariffs on countries purchasing Iranian crude oil.

Iranian President Masoud Pezeszkian rejected the proposal for direct negotiations with the United States on the nuclear programme. However, he indicated that Iran does not rule out the possibility of indirect talks with Washington. It is worth recalling that similar talks have not yielded any results since 2018 when Trump unilaterally withdrew the US from the 2015 nuclear agreement with Iran signed by world powers.

Amid the upcoming decision by President Donald Trump on a new round of tariffs, Goldman Sachs forecasts that aggressive actions by the White House will cause inflation and unemployment to rise, while stifling economic growth almost to a standstill. The investment bank assumes a 15-point rise in tariffs, which may ultimately be reduced to 9 percentage points thanks to exemptions for selected products and countries.

In a note published on Sunday, Goldman Sachs highlighted that the risk associated with the tariffs announced for April 2 is greater than many market participants have so far 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, an increase of 0.5 percentage points compared to the previous forecast and significantly exceeding the Federal Reserve's 2 percent target. Meanwhile, weak economic growth is forecast — only 0.2 percent annually in the first quarter and 1 percent for the full year (measured from the fourth quarter of 2024 to the fourth quarter of 2025), a decrease of 0.5 percentage points compared to the previous forecast.

Goldman Sachs also predicts a rise in unemployment to 4.5 percent, an increase of 0.3 percentage points compared to previous estimates. Overall, the investment bank now assesses the probability of a recession within the next 12 months at 35 percent, compared to the previous indicator of 20 percent.

The forecasts indicate a growing risk of a stagflationary economy, characterised 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, sending the economy into recession, prioritising the fight against inflation over supporting economic growth.

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

While the exact scope of the latest tariffs is not yet known, the Wall Street Journal reported on Sunday that Trump is pressing his team to introduce more aggressive charges, which could mean a 20 percent burden for all US trading partners. Such action would have an unprecedented impact on the American economy and global supply chains.

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