UBS sees a small chance for a 'tariff shock' bear case

Investing.com -- Global equities have seen an increase, while Treasury yields have dropped and the U.S. dollar has retreated in the past 24 hours. This follows a report from the Washington Post indicating that Trump's aides are considering universal tariffs.

These tariffs would apply to all countries, but only to critical imports. If implemented, this move could reduce the most extensive element of Trump's campaign plan.

President-elect Trump quickly refuted the report on social media and criticized the Washington Post's reporting. This reaction helped to alleviate some of the pressure on the dollar and Treasury yields. However, equities continued to be well bid, and Asian stocks broadly advanced on Tuesday, even after Trump's denial.

The future of incoming tariff policy and negotiations remains uncertain. According to UBS, there are several clear takeaways for investors:

The U.S. negotiating stance is expected to differ from the final outcome. President-elect Trump's denial of the report is not surprising. He aims to use the threat of universal tariffs as credible leverage in bilateral trade negotiations. Removing this option now would limit his bargaining power.

The report is viewed as a sign of the difference between a bargaining position and policy goals. It's important to recall Trump's late November threat to impose tariffs over non-trade issues, where he affirmed a willingness to use tariffs as a transactional tool.

The Trump economic team is believed to understand its mandate. Despite potential media criticism that may cause Trump to insist on his promise for harsher tariffs, it is doubted that the administration will pursue extreme policies that could cause inflation to rise, create major supply disruptions, or risk wider economic fallout.

There is also a political calculation involved, as the Republican House majority is already extremely thin. A "shock therapy" approach could significantly harm Republican chances in the 2026 midterms.

According to UBS's Marcelli, there is a small chance for a “tariff shock” bear case.

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Source: Investing.com