When the market is priced at 0, is the large-scale tariff shock "for real this time"?

As the market reacts calmly to Trump's "tariff stick," a key piece of data stands out—the UBS-constructed Tariff Panic Index is currently at zero.

However, Wall Street's major banks warn that this optimism may prove overly naive.

According to the Wind Trading Desk, Deutsche Bank strategist Tim Baker stated in a recent report that Trump has been a staunch supporter of tariff policies for decades, and the recent five months of inflation in the U.S. falling short of expectations may provide the government with reasons and confidence to push for large-scale tariff measures. If the tariffs implemented by the Trump administration are close to the scale mentioned in recent tariff letters, the average tariff rate in the U.S. could jump from the current high of 10% to a median level of 20%. According to CCTV News, Trump stated on the 16th local time that he plans to impose a 10% or 15% tariff on over 150 countries.

This policy shift could trigger increased market volatility, particularly a significant rise in foreign exchange market volatility. Deutsche Bank analysts believe that investors need to reassess their current asset allocation strategies to prepare for potential market shocks.

Stock Market Highs Mask Tariff Risks

Deutsche Bank's report shows that the S&P 500 index is currently at a historical high, with valuations nearing historical peaks, contrasting sharply with the potential tariff risks. Data indicates that the 12-month forward price-to-earnings ratio of the S&P 500 index is close to 24 times, well above the long-term average.

"The current state of the S&P 500 index reaching an all-time high (and valuations nearing historical records) is far from signaling any potential tariff-related damage," the Deutsche Bank report pointed out. The market seems to believe that the tariff policy planned by the U.S. government for August 1 may be weakened or delayed.

Shift in Correlation Between the Dollar and Trade Uncertainty

Deutsche Bank noted that the correlation between the dollar and trade uncertainty has undergone a significant shift, which may be another signal of risk misjudgment.

A few months ago, the dollar had a negative correlation with trade uncertainty, meaning that the dollar typically weakened when trade tensions escalated. However, this relationship has recently turned positive, returning to the situation at the beginning of the year when it was widely expected that only mild tariffs would be imposed, and these tariffs would cause greater harm to trade partners.

"The dollar is once again positively correlated with tariff uncertainty—can this last?" Deutsche Bank report questions.

The report suggests that if tariffs close to those outlined in a recent U.S. letter are implemented, it could shake market confidence in holding dollars, leading to a reallocation of assets.

Continuous decline in inflation may stimulate tariff actions

Deutsche Bank emphasizes that the recent U.S. inflation data has consistently fallen short of expectations, which may provide the government with confidence to advance tariff policies.

Data shows that U.S. core inflation has been below market expectations for five consecutive months, marking the longest continuous decline in the past twenty years. Although the impact of tariffs has already manifested in the details and may continue to do so, this phenomenon of inflation weakness may (whether correctly or not) bolster the government's confidence that the burden of tariffs will be borne by other countries.

"But what if the government views this stable market environment as a backdrop capable of withstanding unexpected large-scale tariffs?" Deutsche Bank raises this key question in the report, reminding investors not to be overly optimistic.

Under large-scale tariff shocks, foreign exchange volatility is likely to rise

Deutsche Bank predicts that if tariff policies are implemented on a large scale, the dollar's performance may weaken, while foreign exchange market volatility will significantly increase.

The report points out that foreign exchange volatility has recently been at low levels, failing to increase alongside rising trade uncertainties. This low volatility condition may indicate that the market is underestimating potential shock risks. Deutsche Bank believes that, in addition to tariff uncertainty, increased uncertainty in central bank decision-making is also a reason for the potential rise in foreign exchange volatility.

The recent unexpected decisions by the central banks of Norway and Australia, along with persistently high core inflation in the UK and Canada (both above 3%), further complicate the policy outlook for global central banks, all of which may contribute to increased volatility in the foreign exchange market