If Trump's "equal tariffs" are overturned, how will the market react?

A legal challenge against the Trump administration's key tariff authority is causing the market to anticipate the possibility of significant, albeit possibly temporary, reversal of trade barriers. According to Winds Trading Platform, Citigroup stated in its latest report that market expectations for the Trump administration to win the case over tariffs under the International Emergency Economic Powers Act (IEEPA) have significantly cooled. The preliminary hearing at the Supreme Court has not been favorable, leading market predictions to show that the government's chances of winning have plummeted from about 40% to 27%. Citigroup believes that if the court ultimately overturns the "reciprocal tariffs" imposed under IEEPA, it could trigger a surge in trading activity, with short-term market reactions including: a decrease in inflation expectations, an increase in the stock market (especially in small-cap stocks), and strength in specific emerging market currencies (such as the Mexican peso and the Brazilian real). However, investors need to remain cautious, as the government still has other legal avenues to reimpose tariffs, meaning any market boost from tariff cancellations could be short-lived. Changing court winds: Legal foundation of IEEPA tariffs shaken The Citigroup report points out that during the first hearing of the IEEPA tariff case this week, the initial comments of the judges were seen as unfavorable to the government. This signal quickly reflected in the prediction market. Data shows that on the day of the hearing, the market's prediction of the government winning the case plummeted from around 40% before the meeting to about 27% by the end of the day. This indicates that the mainstream view of the market is leaning towards the Supreme Court overturning the tariff policy based on IEEPA. The progress of this legal challenge is a key variable affecting market sentiment. Despite setbacks in court, the Trump administration has not exhausted all tools. The Citigroup report emphasizes that even if the IEEPA tariffs are deemed invalid, the government can still resort to other legal means to impose tariffs. Treasury Secretary Bessent, who attended the hearing, expressed optimism about the outcome but also revealed that the government is prepared to use other legal authorizations. These alternative options include: Section 122: Allowing for a wide-ranging 15% tariff to be imposed within 150 days. Section 338: Allowing for tariffs of up to 50% on countries that discriminate against American commerce. Licensing fees argument: Repackaging tariffs as "licensing fees," although this idea was questioned by some judges during the hearing. This means that even if the direct threat of IEEPA is removed, the shadow of tariffs will not entirely disappear, but the form and timing of implementation may change. Short-term winners and losers: Beneficiaries of the "tariff hiatus" If the IEEPA tariffs were overturned, who would benefit in the short term? Citigroup's analysis is as follows: First, at a macro level, the actual effective tariff rate (ETR) in the United States would significantly decrease. The report estimates that the ETR in October had risen to 12.5%, and the estimated rate after the agreements were fully implemented could reach 15.3%. Once the IEEPA is overturned, this rate is expected to fall to around 9%. At the national level, the biggest short-term winners will be those economies that are highly dependent on US trade and most affected by IEEPA tariffs. Citigroup's analysis (taking into account the baseline tariff rates, the proportion of goods subject to tariffs, the percentage of exports to the US, and the proportion of exports to GDP) shows: Biggest winners: Vietnam and Mexico. Similarly benefited: India, as the only major trading partner with the US without an agreement, is expected to see a significant reduction in tariffs from 50% (although currently due to Russian oil sanctions, it should be lowered to 25%). Least benefited: the European Union and the United Kingdom. It is worth noting that this "winners" scenario may be temporary, as the government may consider other ways to reintroduce tariffs. Trading roadmap: Market has already rehearsed a "IEEPA overturned" scenario For investors, the key is how to trade this expectation. The Citigroup report analyzed the performance of assets during intraday trading when market expectations shifted sharply. From 9:30 to 11:30 on the day of the hearing when the chances of IEEPA winning were rapidly declining, the market performance was as follows: Foreign exchange market: the Mexican peso and Brazilian real both rose, while the euro performed flat. This aligns closely with the aforementioned analysis of "winners." Stock market: market sentiment leaned towards bullish, with the Russell 2000 small-cap stock index outperforming the S&P 500 index, which is more sensitive to tariffs. Inflation expectations: One-year inflation swap yields fell by more than 5 basis points, reflecting investors quickly digesting the expectation of reduced inflation pressure on tariffed goods. This article was reproduced from the "Wall Street View" app, written by Ye Zhen; GMTEight editor: Song Zhiying.