US Stocks Surge, TACO Trade Successful! Has Trump's Threat Lost Its Effect?

On Tuesday, May 28, Eastern Time, following the Memorial Day holiday closure on Monday, U.S. stocks, bonds, and currency markets all rebounded, with the three major indices showing strength. Tesla led the gains among the seven tech giants, as the market executed what is known as a "TACO trade."

The "TACO trade" was first coined by Financial Times columnist Robert Armstrong, standing for "Trump Always Chickens Out." It describes the erratic nature of Trump's tariff policies, suggesting that the U.S. government has a low tolerance for market and economic pressures, quickly retreating when tariffs cause pain, thus driving market rebounds.

Tuesday's surge in U.S. stocks was a classic victory for a "TACO trade." Last Friday, Trump announced plans to raise tariffs on EU goods to 50% starting June 1, sparking market panic and a sharp drop in U.S. stocks that day. However, after discussions with EU President Ursula von der Leyen on Sunday, Trump postponed the tariff increase to July 9, leading to a market rally on Tuesday with strong performances across stocks, bonds, and currencies. Previously, a similar "TACO trade" occurred in early April when Trump announced reciprocal tariffs on trade partners only to delay them.

Paul Donovan, an analyst at UBS Wealth Management, noted that such retracements have become commonplace, advising investors to set rational expectations. Some analysts observe that Trump's only certainty is his uncertainty.

The "TACO trade" phenomenon suggests that markets might have seen through Trump's tactics. One indication is that since Trump's April 2 announcement of "reciprocal tariffs," U.S. inflation swap prices have shown little change.

Moreover, assets supposedly vulnerable to tariff impacts have remained stable. For instance, the S&P/TSX Composite Index closed at a record high on Tuesday and has risen 5.4% year-to-date. Deutsche Bank highlighted Canada's heavy reliance on U.S. trade and the subsequent downgrading of its economic growth forecast, making this performance particularly notable. U.S. stocks have also improved, with the S&P 500 closing at 5921.54 points on Tuesday, surpassing levels seen before the "liberation day" in early April.