Last week saw a little more volatility with U.S. and emerging markets doing a 2-3% round trip to finish where they started after optimism about the U.S. economy and the July 9th trade deal deadlines were ’trumped’ by a new plan to revert to ‘Liberation Day’ levels.  

While the U.S. dollar gained some ground, rising 0.3% to 97.5 on the DXY index, the Aussie dollar fell over 1% to 65 US cents. U.S. equities took a hit, with the Dow, S&P 500 and Nasdaq all dropping around 1% on news of 25% tariffs being imposed on major trading partners Japan and South Korea.

The tariff announcements, which also included 30% levies on South Africa and 25-40% on several other nations, came as somewhat of a surprise to markets that had been hoping for more trade deals to be reached before the July 9 deadline. Instead, the Trump administration extended the deadline to August 1 while slapping tariffs on countries unable to reach an agreement, largely in line with the "Liberation Day" rates from April.

The market reaction was relatively muted, likely because concrete details are still lacking on tariffs for key economies like the EU and Australia and the extended deadline gives all sides more opportunity to ‘chicken out'. However, the recent deal with Vietnam, setting a 20% baseline rate, has some wondering if that will be the new normal, rather than the previous 10% expectation, which would probably be net negative for markets. 

In other news, the RBA has unexpectedly kept rates on hold citing higher than expected underlying levels of inflation and uncertainty and reasons to hold fire on rate cuts for now. Fed Chair Powell has come under increasing fire from the White House for not cutting aggressively enough in the US, raising questions about Fed independence. Aussie Treasurer Jim Chalmers has been much more restrained but has not hid the fact that he would have been with the three out of nine members on the RBA Committee that voted to ease. Elsewhere data was generally positive with  German industrial production beating expectations while Japan showed continued wage growth, albeit still below inflation.

Trade tensions are likely to remain the dominant market theme in the weeks ahead, just as the U.S. earnings season begins to shed light on how companies are navigating tariff-related disruption. As Andrew Hunt discusses in this week’s conversation, the front-loaded activity that supported growth in the first quarter may begin to fade, potentially exposing weaker demand. At the same time, global liquidity conditions could tighten as the U.S. ramps up bond issuance to fund the recently passed Big Beautiful Bill, adding another layer of pressure to markets.