Global Financial Markets Hit by "Black Monday": Reciprocal Tariffs Trigger Market Turmoil

Recently, the global financial markets have experienced a severe shock. The three major U.S. stock indices have continued to decline, and European and Asian stock markets have also seen significant drops. The commodity markets have not been spared either, with both crude oil and gold prices falling. The cryptocurrency market has also suffered, with Bitcoin dropping over 10% in two days and Ethereum plummeting by 20%. The entire global financial market presents a scene of a "green ocean."

In this situation, the President of the United States has shown a calm attitude, comparing the current market reaction to "taking medicine when sick." However, is this approach a temporary fix or a fundamental solution? When will the impact on the market be eliminated? These questions hang over the global market like dark clouds.

At the beginning of this month, the President of the United States signed two executive orders regarding "reciprocal tariffs", announcing a "minimum baseline tariff" of 10% on trade partners and imposing higher tariffs on certain trade partners. This marks the official implementation of the reciprocal tariff policy.

Initially, the global community may have viewed reciprocal tariffs merely as a negotiation strategy, but it now seems that there are deeper ambitions behind this. The costs associated with implementing this policy are indeed significant.

In response, our country quickly took countermeasures. The Tariff Policy Committee of the State Council, the Ministry of Commerce, and the General Administration of Customs have continuously announced several countermeasures against the U.S., declaring that starting from April 10 at 12:01, an additional 34% tariff will be imposed on imported goods originating from the United States based on the current applicable tariff rates. This marks the emergence of a global trade war.

As the tariff dispute continues to escalate, global financial markets experienced an unprecedented crash on April 7. U.S. stock futures extended last week's downward trend, with Nasdaq futures dropping over 5% and S&P 500 futures falling more than 4%. In just two trading days, the market capitalization of U.S. stocks evaporated to an amount equivalent to the combined GDP of Germany and South Korea for 2024. European stock index futures also suffered heavy losses, with the Euro STOXX 50 futures down over 4% and DAX futures nearing a 5% decline. The Asian markets were not spared either, as the stock markets of Japan and South Korea crashed again, with the KOSPI opening down more than 4% and the Nikkei 225 index falling nearly 2%. The Hong Kong Hang Seng Index closed at 19,828 points, plummeting 3,021 points throughout the day, a drop of 13.2%, marking the largest single-day decline since October 28, 1997.

The cryptocurrency market has also encountered a tremendous impact. Bitcoin's price fell by more than 10% within two days, briefly dropping below the $75,000 threshold. Other cryptocurrencies experienced an overall collapse, with Ethereum falling below $1,500 and SOL hitting a low of $100. According to a certain data platform, there were a total of 487,700 liquidations worldwide that day, with a liquidation amount exceeding $1.632 billion, including $1.25 billion in long liquidations and $380 million in short liquidations.

This series of data fully indicates that global market confidence has plummeted to freezing point, and panic sentiment has sharply risen, making the prospect of a U.S. economic recession a focal point of public discourse once again. The Prime Minister of Canada believes that the U.S. is falling into recession due to the President's aggressive tariff policies. The CEO of a major U.S. asset management firm also expressed agreement, emphasizing that many business leaders believe the U.S. economy may have already fallen into a severe recession. The business community's views are surprisingly consistent; according to a survey, 69% of business leaders expect an economic recession in the U.S., with more than half of them believing that the recession will occur this year.

In fact, there is widespread discontent globally regarding this situation, with some even joking that the U.S. president is shorting America. If this policy is merely a negotiating tactic, it seems to have had an excessive effect. It is reported that over 50 economies are currently engaging with the U.S. on tariff policies, with Vietnam even proposing a zero-tariff strategy as a sign of weakness, and the European Union has also changed its hardline stance, proposing mutual tariff exemptions. However, the U.S. president is not satisfied with this and has reiterated that "tariffs will not be suspended."

From a fundamental perspective, the tariff policy primarily has three objectives: first, to reverse the trade imbalance and trade deficit that the United States has always emphasized; second, to increase U.S. fiscal revenue. Currently, individual income tax and corporate income tax are the main components of the U.S. federal tax revenue structure, with tariffs accounting for a very small proportion. The U.S. attempts to raise the tariff proportion to about 5%, which is expected to generate approximately $700 billion in additional fiscal revenue; third, as a bargaining chip in diplomatic negotiations.

However, from the current situation, this policy seems to have caused a devastating blow. Behind the so-called fair appeals in the United States, a global trade war is continuously escalating. How the situation evolves next has become the focus of global attention. It is expected that consultations and negotiations will continue. Aside from our country's strong countermeasures, different voices have also emerged within the EU, while the attitudes of other Asian countries are generally not very hardline. Overall, it is likely that the tariff rates will not continue to rise, but may instead decrease after a consensus is reached among all parties, ultimately achieving a balanced state.

On the other hand, the market is more concerned about the impact of the tariff policy on the recession of the U.S. economy. First, there is the issue of inflation. According to research by the New York Fed, imported goods account for 28% of consumer spending, and for every 10% increase in the import tariff rate, the short-term inflation rate will rise by 0.4 percentage points. Based on this theory, in the short term, inflation seems inevitable due to the significant increase in import tariffs. Research institutions generally predict that the new tariff policy will raise the U.S. price level by 1-2.5%. However, due to the characteristic of tariffs being "whoever is weaker pays," consumer demand will also show a downward trend, especially for non-essential consumer goods. From an overall perspective, the inflation rate may rise first and then fall.

In addition to inflation issues, economic growth will also be affected. A research institution predicts that the new tariff policy effective until 2025 will cause the actual GDP of the United States to decline by 0.7%. Another institution predicts that Trump's new tariff policy will reduce the GDP growth rate of the United States by about 0.87% in 2025. A large investment bank has raised its expectation of a recession in the United States in 2025 from 40% to 60%.

Unlike when the equivalent tariffs were just proposed last week, recession expectations are becoming a global consensus. Facing the dual pressures of recession and inflation, the Federal Reserve's situation has become more difficult. Overnight interest rate swap data shows that the market currently expects a rate cut of 125 basis points by the end of the year, equivalent to five cuts of 25 basis points each. Just last week, traders generally expected only three rate cuts. According to data from an observation agency, the probability of a rate cut in May has risen to 57%. The U.S. President has also placed greater pressure on the Federal Reserve, stating on social media, "Oil prices are falling, interest rates are declining, food prices are dropping, there is no inflation," and once again criticized the Federal Reserve for being "slow to act" and that it should cut rates.

If we follow this path, it is highly likely that the Federal Reserve will restart interest rate cuts in May to alleviate market panic, further becoming the last line of defense in saving the market. Overall analysis shows that although the equal tariff policy has the suspicion of killing one thousand enemies while injuring eight hundred of its own, under the support of a healthy and strong private sector balance sheet, although it may cause severe fluctuations in the short term, the possibility of triggering a recession in the U.S. economy in the long term is not as high as imagined with the progress of negotiations and the beginning of the interest rate cut cycle.

Looking at the global stock markets, many countries have begun to take action to rescue the markets. Our country's "national team" has entered the market, increasing its holdings of ETFs by 50.5 billion yuan in a single day, comprehensively rescuing the market from individual stocks to indices. Japan and South Korea have also frequently taken action, with their stock markets opening high across the board today. This is enough to demonstrate that yesterday's epic plunge was more due to emotional panic rather than a true recession.

A false report also confirmed this point. Last night, a certain media outlet reported that the U.S. President was considering suspending tariffs for 90 days. Within seven minutes of this news breaking, all stock indices quickly rebounded, and Bitcoin also rose to $80,000. Although later, the White House press secretary clarified that this was "fake news", the market's upward momentum eased, but there was no further significant decline, initially showing certain bottom characteristics. From this, it can be inferred that there may be a rebound in the global financial markets today.

The cryptocurrency market has shown a similar trend. Although the crypto market has fully rebounded, with Bitcoin returning to $80,000, other cryptocurrencies are still struggling. Ethereum has risen above $1,500 again, and SOL has also rebounded to $110, but the overall situation remains bleak. From yesterday's trading data, most holders are adopting a wait-and-see attitude, and the trading volume is not high, with risk aversion seeming to be the main reason rather than selling pressure. In this case, if the tariff issues are alleviated, there is a high possibility that assets will stop falling and rebound. After all, the quick rebound within seven minutes shows that funds are still interested in high-quality assets at low prices. However, whether a real reversal can be achieved will depend on the situation of recession and interest rate cuts, and the Federal Reserve's market rescue actions will be key.

There is a significant divergence of opinion among traders regarding the direction of the market. Some believe that there is still downward space in this round of selling, citing the lack of potential for a "Federal Reserve backstop" or a "presidential backstop." They argue that the Federal Reserve places more importance on hard data, and Powell values his historical positioning, so the Fed will not easily intervene in the market and must wait for clearer inflation signals. Others believe that the final version of the tariff on equal terms will not be released until the 9th, so before that, it is mostly a negotiation period. It is too early to define the overall magnitude of this tariff and its impact on the economy, and one should not hastily judge whether the president will be impeached. Some analysts have stated that if April 9 approaches without a trade agreement between China and the U.S., market sentiment could collapse again. Currently, market sentiment is polarized, and panic levels have reached those of March 2020, indicating that more volatility may be on the horizon.

Technical analysts seem to be more pessimistic, with some stating that the larger trend is downward, while others believe that the slow rebound in the downtrend will only trigger more severe declines, predicting that the price of Bitcoin may fall to between $66,000 and $72,000. Currently, according to a certain data platform, the funding rates on major exchanges indicate that the market is broadly bearish.

As things stand, April 9 is approaching, and it is clearly unlikely to reach a complex agreement in a short time. The U.S. Treasury Secretary has also stated that it is unlikely to reach a trade agreement before April 9. However, the internal situation in the U.S. is not entirely unified. In addition to the President's close aides advising against reciprocal tariffs, Republican members are also under pressure from donors to counsel the President. Nevertheless, the President still shows a very resolute attitude.

In this context, the Federal Reserve is facing significant internal and external pressures. Federal Reserve officials admit that policymakers are feeling anxious. This Thursday, the Federal Reserve will release the minutes from the March monetary policy meeting, which may provide more clues. It remains to be seen whether the market will experience rollercoaster-like fluctuations again.