You may not recall or perhaps weren’t active in the markets during 2018, but that year experienced a sharp sell-off in January and February, followed by a brief recovery before finally bottoming out on 2 April, amid the initial phase of the Trump 1.0 trade war, mainly with China. A substantial rally followed this downturn in US equities, driving the S&P 500 to new highs, only for everything to collapse dramatically in the final quarter of the year as economic impacts finally took hold.
If this narrative sounds somewhat familiar, that’s because we are experiencing similar conditions today. History tends to repeat itself, and the damage from current tariffs may not become apparent until the latter half of 2025. In 2018, a combination of tariff impacts and the US Federal Reserve's slow rate reduction, despite clear signs of an economic slowdown, catalysed the sharp year-end sell-off.
The bottom line is that we can expect to see more volatility in the second half of the year, not just in the stock market, but also in interest rates, currencies, and commodities.
Given the recent surge in AI and technology stocks, along with new tariffs imposed on Japan and South Korea, as well as a 50% tariff on copper and potential tariffs on Taiwan, the risk of a severe backlash in the technology sector in the second half of the year is heightened.
The PHLX Semiconductor Index (ETF: SOXX) has been trending upward and, notably, appears to be forming a rising wedge pattern as it attempts to fill a gap from July 16, 2024. Significantly, this rising wedge pattern is also evident in the relative strength index (RSI). A break below this uptrend would not only indicate a possible trend reversal but also signal the breakdown of the rising wedge, implying substantial downside risk.
One thing that is beginning to evolve similarly to 2018 is the current dollar weakness, which was subsequently followed by a period of dollar strength. The charts today suggest that the dollar may be starting to turn higher again.
Although subtle, the RSI for the EUR/USD recently formed a lower high, reaching 75.3 on 1 July, after peaking at 76.1 on 11 April. Meanwhile, the price chart made a higher high – a potential sign of bearish divergence. Currently, the 10-day exponential moving average has been serving as support for the euro; however, a break below this moving average would set up a critical test of the uptrend in place since the end of February. Breaking that trend line around 1.16 would indicate the euro's strength is over, and the dollar is likely to return to dominance.
With tariff rates and timelines often being a moving target, it’s clear that timing their exact impact – or determining if they’ll have an impact at all – is challenging. One thing, however, is sure: tariffs have been a topic President Trump has discussed for decades. It appears they’re here to stay, and their effects are yet to be fully realised.
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