In Thursday’s note, we drew your attention to the seemingly unquenchable thirst for both equities and one of the safest of havens, gold. These two asset classes usually decouple during economic crises, so the fact that they have been moving in lockstep over the past 9–12 months insinuates perpetual investor optimism. A troubling sign, nonetheless, is that gold has been outperforming equities, which can ultimately signal turbulence ahead.

We attributed gold’s strength to persistent central bank buying as trust in the dollar erodes. Economic uncertainty, trade tariffs, and the possible revival of inflationary pressures, against which the precious metal is an obvious hedge, have also contributed to this unprecedented bull run. Finally, lower interest rates in developed economies have been an undeniable factor behind gold’s fortunes.

All of the above suggest an ominous backdrop; therefore, two questions need to be addressed: whether the recent faith in equities is justified by fundamentals, and whether this buoyancy is sustainable. The second dilemma is particularly acute in light of last week’s growing anxiety about the health of the US banking sector.

But first things first. The head of the Federal Reserve and the managing director of the International Monetary Fund both sounded more upbeat last week on economic prospects than in previous months. Jay Powell sees the US economy as being “on a somewhat firmer trajectory than expected,” despite cracks in the labour market. An end-of-October interest rate cut is a virtual shoo-in. Kristalina Georgieva, ahead of the IMF/World Bank meetings, also stressed the resilience of the global economy.

Since the ill-fated “Liberation Day” tariff announcement on April 2, global and US equities have rallied 36% and 52% (Nasdaq Composite Index), respectively. One reason is that, whether you call it the TACO phenomenon, a climbdown, economic common sense, or the power of the stock market, US tariffs are, in practice, lower than implied by the infamous table brandished around in early April. The Liberation Day rate of 23% dropped to around 17% after a series of clumsy trade deals were struck, and, according to the IMF, the effective tariff now stands at roughly 9–10%.

Secondly, most trading partners wisely decided not to retaliate. While it might appear a pliant strategy, it could well have taken the inflationary wind out of their sails while strengthening it in the US. The notable and obvious antagonist is China, which will be discussed below. Thirdly, US businesses front-loaded imports and decided, or were forced, not to pass on the extra costs to consumers. Of course, they will not be able to absorb higher costs indefinitely. Lastly, the stratospheric rise of AI companies and deregulation have also helped maintain the sanguine mood among stock market participants.

Does this mean the Trump administration has got it right and learned the “Liberation Day” lesson? On the one hand, judging by stock market strength, it is tempting to say yes. The tech sector’s valuation might be stretched, but the risk of a correction is not systemic, as growth has not been predominantly fuelled by debt. On the other hand, it would be irresponsible to ignore the dark clouds gathering over the global economy. Public debt levels are rising, and governments could struggle to service them. Moreover, import tariffs, possibly sooner rather than later, must also be felt in the form of higher consumer prices in the US. As underlined in Friday’s report, the prices of various imported goods have risen by about 4% and could remain elevated or even climb further.

This leads us to the US–China relationship and the US Supreme Court. The world’s second-largest economy appears willing to pick up the gauntlet and engage in a port, semiconductor, soybean, or even full-blown trade war with its biggest adversary. The US imported $440 billion worth of Chinese goods in 2024; therefore, the repercussions of a complete fallout would be nothing short of catastrophic for the US (and, to a lesser extent, for China).

The arbitrary view from this chair is that it will not happen, not even if, after hearing the cases on November 5 challenging the legality of the International Emergency Economic Powers Act (IEEPA) to impose tariffs, the US Supreme Court rules that the use of such emergency powers is permissible. While that would provide a legal green light for the Administration to treat any trading partner as a threat to US national interests, and tacitly endorse the concept of “unitary executive power,” a fancy name for autocracy, recent experience, such as the early-April and the October 10 stock market sell-off, strongly suggests that the trade war with China will not go much beyond verbal sabre-rattling.

This is not to say that stock markets will not correct. Tariffs are effectively taxes; they impede economic growth and drive consumer prices higher. When inflation picks up, the Federal Reserve will pause its rate cuts. The expected correction, nonetheless, is unlikely to be anywhere near as severe as the 2007–2009 rout. The economy, for now, is on a much more solid footing than 17 years ago, thanks largely to the AI boom. The risks sweeping through the banking sector last Thursday appear contained for now, and the move higher continued a day later. If the IEEPA is deemed illegal and the US Administration chooses not to contest the decision (unlikely), equities should stay firm in the foreseeable future. The adverse medium to long-term implications of US trade policies, uneven growth, gradual but discernible international isolation and the slow fraying of the social fabric with negative economic consequences will be the topic for another report.

The doomsday scenario would come in one of two forms: an irreversible deterioration in the US–China relationship leading to protracted and high reciprocal import tariffs and resulting in galloping consumer prices, or fiscal deficits in the US and other developed nations widening to the point of rattling global bond markets. Although oil dropped more than 2% last week due to the expected swelling in global stockpiles and rising supply, and the contango is now within reach on the two crude oil benchmarks, only in either of the above scenarios would it be reasonable to anticipate oil being dragged significantly lower, possibly toward the $50/bbl mark for Brent.

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