The US Supreme Court will soon decide on the lawfulness of President Trump’s global tariffs, coinciding with the release of December’s US Labour market report. This decision could influence financial markets, given the appetite for risky assets and the pro-cyclical rally observed in Asia, UK, and emerging markets, despite political tensions in Venezuela.
Friday’s court ruling carries consequences both domestically and internationally. If tariffs are deemed legal, fears may arise of more being introduced. If deemed illegal, this may affect plans for US tax cuts funded by tariff levies, impacting US stocks linked to consumers. Current prediction markets estimate a 25% chance the court will support the tariffs.
Potential Relief Rally
A ruling against Trump’s tariffs could result in a relief rally outside the US, with the potential for continued growth, especially in affected countries like India, Brazil, South Africa, and Canada. The MSCI World index ex US, Nikkei, FTSE 100, and Eurostoxx 50 index have been outperforming the S&P 500, and this trend might continue if the court rules unfavourably toward tariff policies.
We are facing a major volatility event this Friday with the Supreme Court’s tariff ruling and the December jobs report. The CBOE Volatility Index, or VIX, has already climbed to 18 this week, reflecting the market’s uncertainty over these two significant events. This suggests traders are pricing in a sharp move for the S&P 500 by the end of the week.
If the court rules against the tariffs, as prediction markets suggest with 75% probability, we could see a strong relief rally in markets outside the US. The iShares MSCI Emerging Markets ETF (EEM) is already up 4% this year, and a favorable ruling could accelerate gains for markets in Canada, India, and Brazil. This outcome would likely weaken the US dollar, further boosting international equity returns.
Looking back at the trade disputes in 2018 and 2019, we saw that sectors with global supply chains, like technology and industrials, were hit hardest by tariff threats. A ruling to strike them down would likely benefit these same sectors most, particularly those with significant overseas sales and manufacturing. We should watch for outsized moves in semiconductor and heavy machinery stocks.
Market Reactions to the Court Decision
A surprise ruling upholding the tariffs would likely hit risk assets hard, as it opens the door to further protectionist measures. In this scenario, we would expect a flight to safety, benefiting US Treasuries and potentially strengthening the dollar. Traders might consider buying puts on the Industrial Select Sector SPDR Fund (XLI) as a hedge against this outcome.
Given the binary nature of the court decision, buying options straddles on broad indices like the SPY or the iShares Russell 2000 ETF (IWM) could be a way to trade the expected price swing. This strategy profits from a large move in either direction, isolating the trade from having to correctly guess the court’s decision. The elevated VIX means these options are more expensive, but the potential move could justify the cost.
The jobs report adds another layer of complexity, as a strong number could support the US dollar and temper some of the enthusiasm for international equities, even if tariffs are struck down. Conversely, a weak report combined with an anti-tariff ruling would be a powerful catalyst for a global risk-on rally. We will need to be ready to react as both pieces of news hit the market simultaneously this Friday.
