News of the week summary - 01/06/2025

White House doubles down on tariffs after court rules that they are illegal

The White House has vowed to press on with its global trade strategy despite a US Court of International Trade ruling that struck down Donald Trump’s sweeping “liberation day” tariffs as illegal. The court found Trump had no legal authority to invoke emergency economic powers to justify the levies, casting a shadow over a central pillar of his trade agenda.

Undeterred, the administration rapidly announced its intention to appeal. Peter Navarro, Trump’s top trade adviser and a key architect of the tariff campaign, insisted the ruling would not derail the administration’s broader trade war. “Nothing has really changed,” Navarro said. “We are still, as we speak, having countries call us and tell us they want a deal.” He maintained that the administration had other legal mechanisms available to impose a universal 10% baseline tariff, along with higher, country-specific “reciprocal” duties.

The market reaction was muted, with Wall Street analysts largely concluding that while the ruling could complicate and delay trade talks, it would not halt the administration’s efforts. Citi noted the administration could still maintain high tariffs and generate “substantial” revenue by relying on alternative legal justifications. Goldman Sachs president John Waldron echoed that assessment, predicting a move toward a 10% baseline tariff on all imports, supplemented by targeted duties on specific countries.

Nevertheless, the court’s decision introduces legal uncertainty at a critical moment, as the US seeks to lock in trade deals with dozens of countries. EU officials said next week’s negotiations in Paris with US trade representatives would proceed as planned, but observers noted the ruling could dampen momentum and strain ongoing talks.

Saudi Arabia reassesses its strategy amid falling oil revenues

Saudi Arabia is confronting a dual challenge: falling oil prices and reduced oil exports, which have put pressure on the government’s finances and led to a reassessment of how the kingdom manages its massive development agenda. While the government intends to maintain its current pace of spending to support economic growth, it is using the moment to pause and review the direction and efficiency of its large-scale investment projects.

Finance Minister Mohammed al-Jadaan emphasized that the country is not retreating from its ambitions, but rather taking a pragmatic step back to evaluate whether certain projects are being rushed, misaligned with priorities, or could benefit from rescheduling. This approach comes as Brent crude oil is trading around $64 a barrel, down sharply from last year’s average of $82, causing an 18% drop in oil revenues in the first quarter of 2025 compared to a year earlier. The resulting fiscal deficit of $15.6 billion was the largest quarterly shortfall since 2021.

This situation is particularly sensitive for Saudi Arabia, which historically has experienced boom-and-bust cycles tied to oil price volatility. To avoid repeating this pattern, the government aims to act “counter-cyclically”, a strategy in which public spending is increased during downturns to stabilize the economy, rather than being cut to balance budgets. This stands in contrast to “pro-cyclical” policies that amplify economic fluctuations by reducing spending in bad times.

Despite the pressure, Riyadh remains committed to its long-term $1 trillion diversification plan led by Crown Prince Mohammed bin Salman. Central to this vision is the Public Investment Fund (PIF), a sovereign wealth fund with nearly $1 trillion in assets, which is tasked with overseeing megaprojects like Neom, a planned $500 billion futuristic city. The PIF itself is undergoing a cautious reassessment to ensure its investments remain realistic and impactful under the new economic conditions.

While overall government spending is slightly lower than last year, key sectors such as tourism, manufacturing, logistics, renewable energy, and technology continue to be prioritized as the kingdom seeks to reduce its reliance on oil. However, with Saudi oil production currently at its lowest since 2011 due to voluntary cuts agreed under the Opec+ alliance, and the slow unwinding of those cuts threatening to depress prices further, the government’s financial room for maneuver is narrowing.

Tensions resurface as Trump accuses China of breaching trade truce

The fragile ceasefire in the ongoing US-China trade war is already under strain, just two weeks after the two superpowers agreed to ease tariffs in a deal negotiated in Geneva. US President Donald Trump has accused China of violating the terms of the agreement, reigniting concerns about the stability of trade relations between the world’s two largest economies.

While Trump did not specify how the agreement was breached, US Trade Representative Jamieson Greer pointed to China’s delay in lifting non-tariff countermeasures. These measures, distinct from tariffs, include restrictions like blacklisting US firms and limiting exports of key goods. In this case, China has been slow to resume exports of rare earth magnets, critical inputs for technologies such as electric vehicles and wind turbines. Non-tariff barriers like these can be just as economically disruptive as tariffs, especially when they target strategically important industries.

Adding legal complexity, a US trade court recently ruled that Trump did not have the legal authority to impose the sweeping tariffs he announced in April. Though a higher court has temporarily paused this decision while the White House appeals, the ruling casts doubt on the legal foundations of Trump's trade strategy.

The trade tensions have already had real economic effects. April imports into the US dropped nearly 20% compared to March, the sharpest monthly fall since data collection began in 1992. This dramatic contraction came after businesses front-loaded purchases in March to avoid being hit by Trump’s new tariffs, which were announced on April 2. The data signals the volatility such trade policy uncertainty injects into supply chains and corporate planning.

Meanwhile, consumer spending also showed signs of slowing, falling from a growth rate of 0.7% in March to just 0.2% in April, according to the Bureau of Economic Analysis. This could reflect both the delayed effects of higher prices from tariffs and increased caution among consumers amid growing economic uncertainty.

While Trump hinted at potentially re-engaging in talks with Chinese President Xi Jinping, Treasury Secretary Scott Bessent acknowledged that negotiations are currently “a bit stalled.” China has not commented publicly, but if trade talks continue to falter, markets may have to brace for a renewed escalation of tensions.

US Treasury Secretary Bessent seeks to reassure markets

As investor concerns over the sustainability of US public finances intensify, Treasury Secretary Scott Bessent has made a firm public commitment: the United States will not default on its debt. In an interview on TV today, Bessent said, "We are on the warning track and we will never hit the wall".

The immediate source of anxiety is the Republican push for a massive new budget bill, which is expected to significantly expand the federal deficit. This has coincided with a rare and troubling divergence between US Treasury yields and the dollar, two indicators that traditionally move in tandem. Normally, higher yields on government bonds signal economic strength and attract foreign capital, supporting the dollar. However, since Trump’s early April “liberation day” tariffs, yields on the 10-year Treasury have climbed from 4.16% to 4.42%, while the dollar has dropped nearly 5% against a basket of global currencies. This disconnect suggests that investors may be viewing rising yields not as a sign of economic strength, but as a reflection of increased risk.

Those fears are being reinforced by several developments. Moody’s recently downgraded the US credit rating, while the Congressional Budget Office warned in March that US debt-to-GDP is on track to exceed its World War II-era highs, even without the new Republican proposed budget. 

Meanwhile, institutional credibility is under strain. Trump’s open pressure on Federal Reserve Chair Jay Powell to cut interest rates, culminating in a White House summons last week, has spooked investors concerned about the central bank’s independence. 

EU plans broad stress test of non-bank financial institutions

European regulators are preparing their first system-wide stress test targeting non-bank financial institutions, which shows the growing concern over the risks posed by the rapid rise of less-regulated lenders like hedge funds, private credit firms, insurers, and pension funds. This initiative, still in the planning phase, could be launched next year and would mimic a similar exercise carried out by the Bank of England in 2023. The aim is to better understand how shocks in this expanding sector could ripple through the broader financial system.

Over the past decade, lending has increasingly shifted away from traditional banks toward non-banks that operate with far lighter oversight. These non-bank entities now account for around a quarter of the eurozone’s €19 trillion in outstanding loans, with pension funds and insurers taking on a larger share. Lending by eurozone banks to these shadow banking firms has also surged, tripling since 1999 to hit €6 trillion by the end of 2023, deepening the interconnections between regulated and non-regulated sectors.

Officials fear that this opacity and interconnectedness could spark or worsen financial crises. Non-banks have played a role in several recent episodes of market disruption, from the post-COVID bond selloff and the collapse of Archegos Capital to liquidity strains among energy traders after Russia’s invasion of Ukraine. 

There’s also anxiety over the EU's lagging regulation of money market funds, which still operate under laxer liquidity standards compared to the US and UK. Some countries, like France, are already pushing ahead with national-level stress tests, but the EU-wide effort would mark an important step in expanding oversight beyond traditional financial institutions. The exercise would draw on the experience of existing stress tests already conducted for banks, insurers, and other financial entities across the bloc. For hedge funds, private lenders, and money market funds, this initiative could herald tighter scrutiny and possibly new rules down the line, particularly if the stress tests reveal serious vulnerabilities.