Citi Interprets the New U.S. Tariff Policy: Three Market Scenarios May Emerge on April 2.
Author: Zhao Ying, Wall Street Insights
As the U.S. tariff policy is set to be unveiled on April 2, market uncertainty will reach new heights, and investors need to buckle up for the turbulence ahead!
According to CCTV News on Saturday, it was reported on March 28 local time that U.S. President Trump plans to announce new tariffs in the coming days. He expressed a certain openness to reaching tariff agreements with other countries but hinted that any agreements would be made after the tariffs take effect on April 2.
When asked if this would happen before the announcement of the tariff increases on April 2, he said, "No, it's likely to happen later." Trump also reiterated plans to announce drug tariffs but refused to disclose the specific rates.
In its latest report, Citi summarized three main scenarios and their corresponding market impacts. The first scenario involves only announcing reciprocal tariffs, which would result in a relatively limited market reaction. The second scenario includes reciprocal tariffs plus a value-added tax (VAT), which could lead to an immediate increase of 50-100 basis points in the dollar index and a potential decline in global stock markets. The third scenario involves not only reciprocal tariffs and VAT but also sector-specific tariffs, which could provoke a more severe market reaction.
After the S&P 500 faced its worst first-quarter start since 2020, analysts have warned that the potential for further declines outweighs the chances of an increase. Some analysts pointed out that future tariffs and retaliatory actions are key, and the market reaction on "April 2" will largely depend on the timing of the tariffs, especially sector tariffs and the speed of other countries' responses to reciprocal tariffs.
Three Major Tariff Scenarios
Citi's report noted that as the announcement of the tariff measures on April 2 approaches, three main scenarios were summarized based on survey results, along with their market impacts:
Scenario 1: Only Announcing Reciprocal Tariffs: If the Trump administration only announces reciprocal tariffs based on the simple average tariff gap of Most Favored Nation (MFN) on April 2, this would be a relatively mild outcome. According to a Nomura survey, about 25.5% of respondents believe this scenario is likely, with countries like India, Thailand, and Indonesia potentially being the most affected. In this case, the market reaction may be limited, and the dollar index may not experience significant fluctuations.
Scenario 2: Reciprocal Tariffs Plus Value-Added Tax (VAT): If the tariff policy includes a VAT, this would be a more aggressive move, potentially triggering risk-averse sentiment and a stronger dollar. In this scenario, Germany's MFN tariff gap (including a 19% VAT) is 20.4%, France is 21.1%, and Spain is 21.8%. The Asia region also faces risks, with Japan at 10.5%, India at 29.5%, and Thailand at 13.0%. This scenario could lead to an immediate increase of 50-100 basis points in the dollar index (DXY) after the announcement, but at the same time, the dollar may weaken against the yen, and global stock markets could decline. Asian interest rates may drop, with India and Thailand potentially decreasing by 5-7 basis points.
Scenario 3: More Aggressive Tariff Policy: In addition to reciprocal tariffs and VAT, this scenario may also include sector-specific tariffs. For example, Trump previously announced a 25% tariff on imported finished vehicles (potentially affecting Mexico, South Korea, Japan, Canada, and Germany) and hinted at tariffs on semiconductor chips and pharmaceuticals (with South Korea and Singapore being the most affected). Additionally, there may be no extension of the 25% tariff deadline on Mexico and Canada, or tariffs may be imposed on countries importing Venezuelan oil. In this scenario, the market reaction could be the most severe, with the dollar index potentially strengthening further, while the dollar may significantly weaken against the yen.
Market Prepares for Turbulence!
The "roller coaster" journey of U.S. stocks has just begun, with the S&P 500 heading towards its worst first-quarter performance since 2020, and the upcoming tariff policy may further exacerbate market volatility.
The tariff policy statement on April 2 will reveal which countries and industries the Trump administration will target, and the market is expected to experience significant fluctuations. U.S. stocks will be heavily influenced by the severity, duration, target countries and industries of the tariffs, as well as retaliatory measures from trade partners.
Mark Malek, Chief Investment Officer at Siebert Financial, stated:
I am a firm bull, but I want to tell you that from now until next week, especially before the earnings season begins, the potential for a decline in U.S. stocks is greater than the potential for an increase.
Michael Arone, Chief Investment Strategist at State Street Global Advisors, said:
Uncertainty continues to plague the market, bringing volatility, and there may be more fluctuations on April 2 and after the deadline.
Angelo Kourkafas, Senior Investment Strategist at Edward Jones, remarked:
The statement on April 2 may "not be a one-time event"; it is an important milestone, but ultimately it does not completely eliminate all uncertainties.
Matthew Aks, Senior Strategist at Evercore ISI, cautioned:
The market reaction on April 2 "will largely depend on" the timing of future tariffs, especially sector tariffs, and the speed of other countries' responses to reciprocal tariffs. If other countries take retaliatory actions, this will pose a risk of escalation, potentially undermining any sense of relief.
According to CCTV News, when Trump was asked during an interview on "Air Force One" en route to Florida whether he would be willing to discuss reaching a tariff reduction agreement with countries like the UK, he stated, "If we can get something out of this deal, it's possible—but you know, we've been taken advantage of for 40 years, or even longer. That won't happen again. But yes, I would certainly be open to it."
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