Every Tuesday afternoon we publish a collection of topics and give our expert opinion about the Equity Markets.

With the passing of the Big Beautiful Bill and its lack of spending cuts, forecasted to add US$5 trillion to the US debt hole, it appears, President Donald Trump is going all-in on tariffs. But as the calendar ticked closer to the end of the initial 90-day pause of July 9, a new August 1, 2025 deadline was announced to give countries more time to cut deals. Stakeholders have been assured this will not be extended again, yet for markets and global trading partners, déjà vu is setting in. Promises of hardline trade policy followed by eleventh-hour reprieves have become the hallmark of Trump’s economic agenda. ABSI this week explores the TACO trade, tariffs, and the US debt gamble. 

The original "Liberation Day" tariffs were introduced to close America’s ballooning budget deficit, with levies ranging from 10% to 50% on countries without a favourable trade arrangement. But mounting political pressure and unfinished negotiations have led to a second delay, shifting the effective start to August 1. Whether that deadline holds remains to be seen, but the clock is still ticking.

In the meantime, the U.S. has inked deals with Vietnam, the United Kingdom, and China—though the China arrangement is limited to easing certain restrictions, not a full-blown agreement. Talks with India and the European Union continue with urgency, but officials acknowledge that a comprehensive EU deal is unlikely before the deadline.

Source: Nation Thailand

Australia, notably, has been told to be content with its 10% baseline tariff, with Prime Minister Anthony Albanese acknowledging there's little chance of a better outcome. Foreign Minister Penny Wong has pushed for a reduction, but U.S. officials remain unmoved. In the eyes of the Trump administration, Australia’s exemption from the higher tiers of tariffs is already a diplomatic win.

What’s surprised many is the market’s resilience. Since the “Liberation Day” shock, U.S. equities have staged a massive rally, pushing to new record highs. Technology stocks in particular have surged, with investors seemingly brushing off any macroeconomic drag from disrupted trade flows. 

But markets may be mispricing risk by assuming Trump will once again retreat. The “TACO” pattern has so far rewarded dip buyers. Volatility remains near cycle lows, and sentiment is bordering on euphoric. This complacency could be dangerous, especially if the Fed’s upcoming July 30 meeting coincides with market disappointment on trade.

Overnight (Monday 7th July) the Trump administration released letters it had sent to 14 countries letting them know the tariff rate to be imposed from August 1 if they didn’t come to the negotiation table. The most notable recipients were South Korea and Japan which will be hit with 25% tariffs. This move slightly rattled markets with the Dow and Nasdaq down 0.9%. 

Rightfully fueling this entire policy backdrop is the "Big Beautiful Bill", a massive spending package passed last week that is projected to add $5 trillion to the national deficit over the next decade, with U.S. government debt now projected to exceed $50 trillion by 2032.

Trump campaigned on fiscal responsibility and the promise of a balanced budget. But in practice, he's done little to curb spending. Entitlement programs remain untouched, defence outlays are growing, and infrastructure and industrial subsidies have ballooned. The Big Beautiful Bill has turbocharged this trend with debt.

Source: The Economist

DOGE has been a failure in reducing outlays, so now it appears that Trump is all-in on offsetting the spending binge with tariffs. The logic is simple but risky: use trade duties to fund government expansion while betting that GDP growth and corporate investment will dig the country out of its fiscal hole. History suggests this is wishful thinking, given that tariffs are a blunt instrument. They risk consumer price inflation, retaliatory measures, and misallocations of capital. However, if any country were able to pull off this strategy, it would be the United States, given the size of its economy and the consumption of its citizens. 

It appears August 1 will be a pivotal moment for the performance of markets for the rest of the year. Adding a rate cut from the Fed with the fiscal largesse from the BBB and tariff deals for the major U.S. trading partners should send a rocket up markets while the Fed continuing to hold and larger than expected tariffs levied on major trading partners will be the catalyst to unwind the current bull run. 

Trump’s economic playbook is clear. What’s less certain is whether it can continue to kick the U.S. debt can down the road.

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