U.S. President Donald Trump declared a tariff war against the world, leading to a plunge in global asset prices, excluding U.S. bonds. Even gold, considered a safe asset, is weak. Fears that the U.S. administration will not change its hardline policy path even if the U.S. economy experiences a recession due to the intense tariff war have led to panic selling.
The global financial market experienced significant turmoil due to an unexpectedly extensive tariff war, but President Trump noted, "I will not negotiate until the trade deficit is resolved," further fueling the decline in asset prices.
◇ U.S. Wall Street Fear Index (VIX) reaches highest level since COVID-19 pandemic
The U.S. administration's tariff policy is expected to hit its own economy and markets first. U.S. investment bank JP Morgan stated, "The weight of the tariffs will cause the U.S. economy to retreat this year," adjusting its forecast for the U.S. annual real GDP growth rate down from 1.3% to minus (-) 0.3%. U.S. investment banks have collectively lowered their growth rate forecasts for this year, and Kristalina Georgieva, the Managing Director of the International Monetary Fund (IMF), also warned that President Trump's tariff policy poses a significant risk during a period of slowing global economic growth.
Fears of a U.S. economic downturn have led to panic selling in investment assets. The U.S. stock market, which plummeted by 10% over just two days from the 3rd to the 4th, is expected to face further corrections on the 7th. As the U.S. administration maintains a stance of aggressive tariff policies, futures for the Standard & Poor's 500, Nasdaq 100, and Dow are all down around 4%.
The Chicago Board Options Exchange (Cboe) volatility index (VIX), known as Wall Street's Fear Index, has surpassed 45. This is a level not reached in the past 30 years, except for April 2020, during the height of the COVID-19 pandemic.
Asian stock markets have also been hit hard. On the 7th, the KOSPI index plummeted by 5.5%. Early in the session, the futures price of KOSPI 200 dropped sharply, triggering a sell-side circuit breaker that paused program trading for five minutes. The Nikkei average in Japan and the Shanghai Composite Index in China also tumbled by 6-7%, while Hong Kong's H Index fell by over 10%.
The value of gold, traditionally considered a safe asset, has also fallen. Analysts suggest this is due to margin call situations faced by leveraged investors who sold gold, a safe asset, to secure cash. Copper prices have also plummeted.
The dollar is showing mixed trends. The dollar index, which reflects the value of the dollar against six major currencies, fell to about 102. Compared to earlier this year, when it was near 110, it appears that the dollar is weakening, but if we narrow the timeline to after the 3rd, it is on the rise. While there are concerns that aggressive tariff policies could slow the U.S. economy and even shake the status of the dollar as a dominant currency, there is also pressure from buying forces that indicate one should buy dollars in times of crisis.
Due to forecasts that the global economy will slow, international oil prices have also slid to their lowest levels since the COVID-19 situation. In the New York Mercantile Exchange, West Texas Intermediate (WTI) futures fell by 6-7% for two consecutive days from the 3rd to the 4th.
The money that has exited these assets has flowed into U.S. government bonds. The yield on the 10-year U.S. government bonds has fallen below 4% (with bond prices rising), reaching the lowest level since Trump's inauguration.
◇ The performance indicators of U.S. policy are not the stock market but "government bond yields"
Despite ongoing concerns about an economic slowdown due to the tariff war, the reason for the abrupt fall in the global financial market is attributed to the Trump administration's hardline stance.
President Trump remarked on the plummeting U.S. stock market, stating, "I do not want any asset to fall," while adding, "Sometimes, you have to take medicine to solve problems," implying that enduring the side effect of a stock market crash in the process of addressing the massive trade deficit, which he identified as the biggest issue for the U.S. economy, is necessary.
Investors are particularly noting that it is becoming clearer that Trump intended the recent global capital flows. The Trump administration is using government bond yields as indicators of economic policy performance, and, as intended, U.S. government bond yields are falling.
In his congressional address in March, President Trump said, "Interest rates have fallen beautifully," and, "Now we are heading in the right direction." As government bond yields drop, the interest burden that the U.S. federal government must bear also decreases.
The same goes for the weakness of the dollar. As the value of the dollar falls, the competitive pricing of U.S. products for export increases. This could, in turn, reduce the trade deficit and lead to a revival of U.S. manufacturing.
Despite warnings from experts that aggressive tariffs will stimulate domestic prices in the U.S. and depress employment and investment, potentially hurting the U.S. economy first, there is a strong possibility that the declining government bond yields, which President Trump views as performance indicators, are giving the perception of policy effects.
Yoon Yeo-sam, a researcher at MERITZ Securities, stated, "While there is room for negotiation, the imposition of tariffs is casting a shadow over concerns of a U.S. economic slowdown," adding, "There may be a further decline in U.S. government bond yields."