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Investing.com -- Markets have been on edge as tariff headlines remain in the driving seat, but with just a day to go until President Donald Trump’s "liberation day tariffs" herald a new dawn for global trade relations, UBS warns that full pain trade from tariffs isn’t yet fully priced in.
"Markets have moved to price an increasing probability of implementation and impact, but our analysis suggests the full economic fallout of tariffs is not yet reflected," UBS analysts said in a recent note.
Trump is set to announce reciprocal tariffs on trading partners at 3pm ET on Wednesday.
The risk of this partial pricing in of tariff escalations could spark broader economic consequences including slower global growth and inflationary winds.
UBS estimates that 60% tariffs on 75% of Chinese imports to the U.S., alongside 10% tariffs on imports from the rest of the world, could shave 0.5% off global GDP growth.
Inflationary pressures, meanwhile, would vary by region but would predominantly impact the U.S., with price increases across sectors.
UBS modeled 17 different pass-through scenarios ranging from modest economic impacts to more severe slowdowns depending on factors like foreign exchange adjustments, retaliation measures, and tariff subsidies.
Bond markets have already begun reflecting stagflationary pressures. U.S. 10-year real yields have fallen by 30-50 basis points since January, while two-year breakeven inflation expectations have risen by 70 basis points. In equity markets, tariff-sensitive U.S. stocks have underperformed broader indices by 17%, compared to a 9% underperformance in Europe.
Despite the selloff in risk assets seen recently, equity markets in Europe are not fully pricing the potential earnings impact of tariff escalation. Sectors such as autos, luxury goods, and pharmaceuticals are particularly at risk due to their sensitivity to global trade dynamics.
"Tariff-sensitive stocks have room to underperform more, however. We think they could fall a further -10% relative as earnings expectations are revised lower," they added.