"April 2" Trading Manual: The Market's Immediate Concerns, Long-term Worries, and Four Key Highlights

On April 2, a new round of U.S. tariff policies is about to be implemented. Citigroup believes this could become a milestone in "Trade War 2.0," rather than an endpoint. The new round of trade war may trigger a reversal in capital flows, especially as European fiscal policies shift towards easing and U.S. consumer spending weakens. In the short term, the market may experience a "knee-jerk reaction" due to tariff shocks—strengthening the dollar while putting pressure on U.S. stocks and bond yields, but the long-term risk lies in the underestimation of the trade war's drag on U.S. economic growth.

Citigroup's analyst team led by Adam Pickett wrote in their latest research report:

April 2 is approaching, and more U.S. tariffs are imminent, unless there are delays or subsequent cancellations. It is almost certain that the tariff announcement will be made on April 2—barring any unforeseen events. We hope to gain some clear information or at least learn more details about the plans.

Ultimately, April 2 is likely to mark the end of the beginning of Trade War 2.0, rather than the beginning of the end. There will be more deadlines, more updates, and more policy shifts in the future. We view this event risk as a factor that can increase short-term clarity, but this clarity will not last long.

Pickett also pointed out that global investors' allocation to U.S. stocks is at a historical high, and if trade conflicts escalate, capital flow imbalances may exacerbate market volatility. Investors need to pay attention to four key variables: the scale of tariffs, the targeting of countries/industries, execution risks, and retaliatory measures.

Immediate Concern: Market May Be Impacted on April 2

In the short term, the market's reaction to the tariff announcement may unfold along the logic of deteriorating trade conditions. Citigroup believes that if the tariffs announced by the U.S. are large in scale and broad in scope, the market may experience a "knee-jerk reflex" adjustment:

The dollar exchange rate will rise, as trade protectionism may be interpreted by the market as relative support for the dollar in the short term;

Global stock markets will generally decline, especially emerging markets and European stocks, as heightened trade tensions exacerbate market risk aversion ;

The yield on U.S. 10-year Treasury bonds will fall, as funds flow into safe-haven assets.

Current market pricing indicates that investors expect a relatively mild outcome—close to a 10% weighted average increase in tariffs, with a targeted approach and exemptions.

Citigroup's equity strategists' stress test on a 10% increase in the U.S. weighted average tariff shows that the earnings per share (EPS) of the STOXX Europe 600 may decline by 12%, while the EPS of the S&P 500 may decline by 5%-6%.

The report notes that global investors' holdings in U.S. assets have never been so high, especially in U.S. stocks. Citigroup's research shows that the degree of overweight in U.S. assets by global investors is unprecedented, resulting from a mix of purchasing liquidity and significantly outperforming relative prices. This makes the U.S. particularly vulnerable when the stock market may experience sustained declines, as the U.S. stock market supports a large portion of the U.S. twin deficits and accounts for 30% of household wealth.

Citigroup research indicates that while investors have begun to reduce their overweight in U.S. stocks in the short term, there remains a structural overweight in U.S. assets that needs to be digested. Therefore, unless the most hawkish tariff scenario occurs, U.S. stocks may underperform compared to other regions of the world.

Long-term Concerns: The "American Exception" Faces Challenges Again

Citigroup emphasizes that, in the long run, the vulnerability of the U.S. economy may be at risk of being underestimated by the market. The report points out that the advantages of the U.S. relative to other regions of the world are declining. Three key shifts are occurring:

In terms of relative fiscal deficits, the trend of easing in Europe is more pronounced compared to the U.S., especially considering the limited enthusiasm of the Trump administration for fiscal expansion;

The dominance of U.S. tech stocks is being questioned, with valuation bubbles and business model risks raising concerns among investors;

Cracks are appearing in the U.S. growth story, with a weak labor market, and the broad U.S. tariffs may harm the U.S. more than other regions;

If the U.S. raises tariffs and major trading partners also impose retaliatory tariffs of similar magnitude, Citigroup's economic model shows that U.S. GDP growth could decline by 0.5% - 0.7% in the first year, and it may be difficult to return to previous growth levels in the following years.

What to Watch on April 2?

Citigroup has outlined four key angles for investors to closely monitor on April 2:

Overall Scale: The weighted average tariff increase on the U.S. import basket. Citigroup believes that a 10-15% increase aligns with market expectations, with higher being hawkish and lower being dovish.

Country and Industry Data: This is crucial for exchange rates, relative interest rates, and sector rotation in the stock market. Whether to introduce VAT-based reciprocal tariffs is a key variable; recent comments from President Trump suggest it may be "more lenient than reciprocity," but specifics will vary. Citigroup believes that if VAT is used as a guide, European risk exposure is significant.

Implementation Risks: First, the time gap between the announcement date (April 2) and the actual execution date. Using the IEEPA Act may be faster but faces legal challenges, while using the 1974 Trade Act's Section 232 or 301 may be more prudent but take longer. Second, bureaucratic delays; the U.S. Trade Representative's Office (USTR) has limited personnel, and handling complex tariff adjustments may face execution bottlenecks, as seen in the recent delays experienced with the de minimis rule adjustments (citing Reuters February 7 report)

Retaliation Risk: Citigroup economists' model shows that if the U.S. imposes a 10% tariff, the initial impact on U.S. GDP will be greater than that on other regions, but it will subsequently reverse. However, if major trading partners implement a 10% retaliatory tariff, U.S. GDP will suffer a deeper and more lasting blow, and it will not be able to surpass other regions. The report suggests that the market may underestimate the negative impact of a widespread trade war (especially in the case of retaliation) on U.S. GDP.