The US Supreme Court is about to make a decision on the legality of President Trump’s global tariffs, and this coincides with the release of December’s US Labor Market report. This ruling could impact financial markets, especially with the rising interest in riskier assets and the recent market rally seen in Asia, the UK, and emerging markets, despite ongoing political issues in Venezuela. The court ruling on Friday holds significant implications both at home and abroad. If the tariffs are ruled legal, there may be fears of more tariffs being introduced. Conversely, if they are deemed illegal, it could affect plans for US tax cuts funded by tariff revenues, which would impact US stocks related to consumers. Currently, prediction markets say there’s a 25% chance the court will uphold the tariffs.

Possible Relief Rally

If the court rules against Trump’s tariffs, we could see a relief rally in markets outside the US, especially in countries like India, Brazil, South Africa, and Canada. Indices like the MSCI World ex US, Nikkei, FTSE 100, and Eurostoxx 50 have been performing better than the S&P 500, and this pattern may continue with an unfavorable ruling on tariffs. Friday is set to be a day of high volatility due to the Supreme Court’s tariff ruling and the jobs report for December. The CBOE Volatility Index (VIX) has already risen to 18 this week, showing the market’s unease about these major events. This indicates traders expect a significant movement in the S&P 500 by the end of the week. If the court votes against the tariffs, which has a 75% probability according to prediction markets, we could witness a strong relief rally outside the US. The iShares MSCI Emerging Markets ETF (EEM) has already risen 4% this year, and a favorable ruling could lead to even more gains in markets like Canada, India, and Brazil. Such a decision would likely weaken the US dollar, benefiting international equity returns. Looking back at the trade disputes of 2018 and 2019, we noted that sectors with global supply chains, like technology and industrials, were hit the hardest by tariff threats. A ruling against the tariffs would likely help these sectors, especially those with significant overseas sales and production. We should keep an eye on potential big moves in semiconductor and heavy machinery stocks.

Market Reactions to the Court Decision

If the court unexpectedly upholds the tariffs, risk assets could take a significant hit, leading to a flight to safety. This would likely benefit US Treasuries and may strengthen the dollar. Traders might consider buying puts on the Industrial Select Sector SPDR Fund (XLI) to hedge against this outcome. Given that the court’s decision is binary, buying options straddles on broad indices like the SPY or the iShares Russell 2000 ETF (IWM) could be an effective way to respond to the expected market shifts. This trading strategy profits from a significant move in either direction without needing to predict the court’s ruling. The high VIX means these options are pricier, but the potential market movement could make the cost worthwhile. The jobs report also adds complexity. A strong report could support the US dollar and dampen some excitement for international stocks, even if tariffs are struck down. In contrast, a weak jobs report, paired with an anti-tariff ruling, could ignite a global risk-on rally. We need to be prepared to react as both news items hit the market at the same time this Friday. Create your live VT Markets account and start trading now.

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