A US Federal Appeals Court has decided that most tariffs imposed by former President Donald Trump are illegal. The court reasoned that only Congress has the authority to set tariffs and tax policies. It found that the International Emergency Economic Powers Act was incorrectly applied, especially regarding tariffs on fentanyl from countries like Mexico, Canada, and China. The court noted that Congress usually uses words like “duty” or “tariff” when delegating tariff authority, which the Act does not include. Instead, it only allows the President to “regulate… importation.” The ruling will stay in place until October 14, as an appeal is expected to go to the Supreme Court.

Implications Of The Ruling

The case did not address tariffs related to Brazil and India. If the ruling stands, it could change tariff policies, especially if a Republican-led Congress is involved. The US Constitution grants Congress the power to impose taxes uniformly, which is a crucial aspect of this ruling. Economic areas like commodities, stocks, and emerging markets could benefit from the removal of tariffs, leading to global economic growth. However, the bond market is more complex; removing tariffs could decrease inflation, which would affect Federal Reserve policies. Additionally, reduced tariff revenue may impact fiscal stability. The ruling from the Federal Appeals Court has created considerable uncertainty regarding tariffs. With the decision on hold until October 14 and a possible Supreme Court appeal, the chances of removing these tariffs have greatly increased. This suggests a potential shift in global trade trends in the coming weeks.

Market Reactions And Forecasts

This news arrives as US economic growth has slowed to a 1.7% annual rate last quarter, with inflation at 3.2%. If tariffs on over $500 billion of goods are removed, it could significantly lower inflation, giving the Federal Reserve more room to adjust policies. This creates a fertile environment for potential pro-growth rallies. We are closely monitoring commodity currencies, which are closely tied to global growth. For example, the Australian dollar could see strong gains since China, its largest trading partner, would then be able to import more raw materials. During the 2018-2020 period, news about tariff reductions often boosted the AUD/USD pair. In terms of equity derivatives, this situation favors long positions in sectors likely to benefit from increased global trade and economic activity. Options on industrial sector ETFs and emerging market indices are showing higher implied volatility, indicating an expected sharp movement. We see this as a chance to buy call options on these assets to capitalize on potential gains while managing risk ahead of the Supreme Court’s decision. The bond market, however, remains complicated. While removing tariffs could positively impact bonds in terms of deflation, stronger global growth might drive yields up. Additionally, losing tens of billions in annual tariff revenue complicates the US fiscal outlook, which could create additional pressure on Treasuries. Create your live VT Markets account and start trading now.

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