Markets After Liberation Day
A year after the US announced sweeping reciprocal tariffs on April 2, 2025, six major equity markets tell six different stories — shaped by geography, energy exposure, trade deal speed, and the compounding effect of the Iran war. This is the divergence map, the alignment audit, and the domestic political read beneath the surface.
The Bull That Refused to Break
The Liberation Day shock was the sharpest two-day drawdown since the pandemic — –10.5% in 48 hours, with the VIX spiking to 52.3. The April 8 low of 4,982 briefly put the index in bear territory from its February peak of 6,144. What followed was textbook V-recovery: the 90-day tariff pause gave markets a floor, AI enterprise deployment gave them a ceiling to reach for, and the S&P surpassed its pre-Liberation Day level of 5,670 by early May. Full-year 2025 return of +16.4%; record close of 6,932 on Christmas Eve.
The Iran war (Feb 28, 2026) delivered another ~10% drawdown from that record before the ceasefire relief this week erased it entirely. The index crossed 7,000 for the first time on April 15, 2026 — exactly 12.5 months after Liberation Day. Goldman’s CEO Solomon warning of a recession if Hormuz stays shut is the tail risk the relief rally is discounting.
The Accidental Outperformer
The FTSE 100’s +22% return is the most analytically interesting result because it happened for structurally unusual reasons. The index’s historic lack of technology stocks — a persistent disadvantage in 2023–24 — became an advantage when Liberation Day triggered a “sell America” rotation. UK financials, miners, and defence names offered value, yield, and zero AI multiple to compress. Gold miners surged (+364% for Fresnillo on gold’s 64% year); defence stocks powered by European rearmament (Babcock +147%, Rolls-Royce +95%); UK banks reached 2008 levels.
The UK secured the first post-Liberation Day trade deal in May 2025 (10% tariff), removing the policy overhang early. FTSE crossed 9,000 for the first time in July 2025, then 10,000 for the first time in history on January 2, 2026 — the seventh-best annual return ever. The Iran war created a March 2026 dip; ceasefire has now restored the full gain.
Stimulus, Truce, and the PPI Inflection
China’s +21% since Liberation Day is a quiet outperformance story built on three pillars: domestic stimulus providing an earnings floor, the tariff truce framework providing a policy ceiling, and the Iran war providing a perverse energy windfall. As a major buyer of discounted Iranian crude, China’s industrial input costs were cushioned relative to Europe and India. The SSE Composite barely flinched in the early months of the Iran conflict.
The key fundamental signal of April 2026: China’s PPI turned positive (+0.5% YoY in March) for the first time since October 2022. Three years of deflationary pressure on Chinese industrial earnings may be ending. The May Trump–Xi summit is the next catalyst — a durable tariff architecture extension is the trigger for re-rating beyond current levels.
The Energy Hostage
Europe’s +15% return is respectable in absolute terms but represents meaningful underperformance versus the UK and US despite both having early trade deals. The divergence between FTSE and Euro Stoxx tells a specific story: energy import exposure. The EU’s structural dependence on Middle Eastern energy means the Hormuz disruption was not a tail risk but a direct hit to industrial cost bases. EU Economy Commissioner Dombrovskis has flagged a “stagflationary shock” that could cut 0.4–0.6% off EU GDP. The stagflation framing limits ECB optionality in a way the UK and US do not face.
Waiting for the Summit
The Hang Seng’s +14% is a range-trading result driven by sharp relief rallies on US–China de-escalation signals interspersed with geopolitical volatility. Southbound Stock Connect flows from mainland investors have been the structural floor. The index is technically neutral — range 25,300–27,300 — with neither a breakout nor breakdown signal. The May 14–15 Trump–Xi summit in Beijing is the single most important catalyst for this index. A durable trade architecture extension — ideally reducing tariffs below the current 10% baseline — would be the trigger to break the range decisively higher.
The Double-Shock Laggard — And Why the Recovery Trade Is Now Live
India entered Liberation Day already weakened by five consecutive months of Nifty 50 losses (worst streak since 1996). Liberation Day added an additional –7%. Recovery followed: the Nifty reached an all-time high of ~26,373 in October 2025. Then the Iran war’s Hormuz closure hit India’s current account with structural precision. India imports ~85% of its crude; the Brent spike from $70 to $121 in six weeks was the most damaging crude shock India had experienced since 2022. The Nifty fell from ~26,000 to ~22,100 — roughly –15% from the October high.
The recovery trade is now live. This week’s +2% is the first meaningful expression of the Hormuz-reopening thesis for Indian equities. The India–US interim deal (Feb 2026, 18% tariff from 50%) removes a second structural overhang. India’s oil sensitivity is a symmetric variable — it hurt most on the way up and recovers fastest on the way down. One additional conditional: the June–September monsoon onset is now six weeks away, and the ENSO/IOD interaction will determine whether the India macro tailwind from Hormuz normalisation is compounded or offset by a deficient monsoon. This is the variable that makes any India call conditional through Q3 2026.
Alignment is broader than tariff rates. It encompasses verbal support, strategic coordination, military posture, energy choices, institutional stance, and the significance of silences. The taxonomy below maps where each major economy sits across all these dimensions — not just what tariff they pay.
- Trade deal: First mover. Secured 10% baseline — lowest in the universe — in May 2025, no retaliation taken.
- Defence/NATO: UK increased defence spending to 2.5% of GDP in 2025, explicitly framing it as alignment with US burden-sharing demands.
- Iran war: UK diplomatically supported US-Israel position while not providing direct military assets. No public dissent.
- Ukraine: Continued strong support; not a point of tension with Washington under current UK government.
- Epstein files: UK government silent — no comment on Trump connections, treated as a US domestic matter.
- Supreme Court IEEPA ruling: UK welcomed tariff deal certainty; implementation ambiguity post-ruling seen as a US domestic legal matter.
- Market implication: Tariff certainty locked in early. FTSE outperformance is partly a reflection of this political positioning premium.
- Trade deal: Both committed to $550bn (Japan) and large investment pledges in exchange for 15% tariff. Auto and timber preferential treatment secured.
- Security treaties: Both are US bilateral security treaty partners; Trump’s demands for increased financial contributions were partly met through the investment framework.
- China posture: Japan’s Indo-Pacific strategy and South Korea’s semiconductor alignment with US tech controls reinforce strategic alignment.
- Iran war: Both expressed concern about energy supply disruption (Japan imports 90%+ crude); supported diplomatic resolution but made no direct military contribution.
- IEEPA ruling: Quiet relief among trade negotiators — implementation clarity needed before broader market access commitments can move forward.
- Yen / won weakness: Both have been cautious about currency appreciation risks from alignment — a structural tension with US “fair currency” demands.
- Market implication: Nikkei’s strong 2025 recovery partly attributable to deal certainty. Samsung and TSMC supply chain alignment with US is a structural multi-year positive.
- Trade deal: Framework agreement July 2025 at 15%. EU pledged $600bn in US investment — but EU itself characterised this as “not legally binding.”
- Verbal qualification: The EU explicitly distanced itself from the investment pledge’s enforceability — the most public pushback of any “aligned” economy on deal terms.
- Defence: European rearmament spending has accelerated sharply; NATO spending targets being met across more member states than any point in the alliance’s history.
- Iran war stance: EU issued ceasefire call independently; Pope Leo XIV criticised the war (prompting Trump to attack the pontiff publicly). EU’s energy exposure created policy divergence from US on pace of escalation.
- Hungary normalisation: Orbán’s ouster removes the EU’s most disruptive internal veto risk. New Tisza government expected to be more pro-European and more aligned with EU-US coordination on Ukraine and Russia.
- China overcapacity: EU-China tensions rising over EVs, solar, and semiconductors — independently of US position and not always coordinated with Washington.
- Silence on Epstein: EU institutions made no comment. Treated as a US domestic matter.
- Market implication: EU underperformance vs UK and US reflects this partial alignment — the caveats are real. Stagflation risk narrows ECB room to respond.
- Russian oil: India’s continued purchase of discounted Russian crude through 2025 was the primary political friction with Washington. A 25% punitive tariff was imposed on top of the existing 26% reciprocal rate — a total 50% — the highest in Asia-Pacific.
- Non-retaliation but non-compliance: India did not retaliate publicly (unlike EU and China), but also did not change behaviour quickly. This strategic patience worked eventually but cost time and market performance.
- February 2026 pivot: Modi–Trump call led to the interim deal: 18% tariff, India commits to curb Russian oil and buy US energy. Framed as “win-win” by both sides.
- Implementation uncertainty: The IEEPA Supreme Court ruling (Feb 2026) created ambiguity about which tariff rates apply and when. India wanted clarity before signing the full BTA. As of April 2026, the interim deal is intact but the full agreement is not signed.
- Iran war — aligned by consequence: India’s oil import bill exposure meant it had a strong independent interest in a Hormuz resolution, aligning India’s interests with the ceasefire outcome regardless of formal diplomatic position.
- Defence: India–US defence cooperation deepening (QUAD, technology transfer deals) — a positive long-run alignment signal that operates separately from trade tensions.
- Epstein files / domestic US politics: India government made no comment. Modi–Trump personal relationship maintained throughout.
- Market implication: Nifty’s laggard performance is the direct consequence of this delayed, partial alignment. The February deal is the inflection point — but the recovery is just beginning, and it is conditional on Hormuz staying open and monsoon being normal.
- Not aligned — transactional: China and the US are in managed competitive coexistence. The truce serves both sides’ short-term economic interests while structural competition continues.
- Initial retaliation: China was the only major economy to match US tariffs tit-for-tat at 125% before the Geneva truce in May 2025. The escalation-de-escalation cycle is the defining dynamic.
- Technology controls: BIS entity list actions, semiconductor export restrictions, and rare earth export licensing remain in play beneath the diplomatic surface. No substantive rollback.
- Iran: China continued buying Iranian oil throughout the war — including at discounted prices during the conflict. This was a direct economic benefit and an indirect signal of non-alignment with US sanctions posture.
- Russia oil: China maintained Russian oil purchases. In combination with Iran purchases, China’s energy alignment is structurally opposed to US sanctions architecture.
- Taiwan, South China Sea: No change in posture. Military activities in the strait continued. No concessions extracted or offered in trade negotiations.
- Busan summit and May summit: Both sides have incentive to maintain the truce — China’s export sector needs US market access; US needs Chinese rare earths and manufacturing inputs. The May 14–15 Beijing summit is a chance for a multi-year framework.
- Verbal posture: Xi has been strategically warm in bilateral communications while maintaining hostile positions on structural issues. “Win-win” rhetoric masks unchanged strategic competition.
- Market implication: Hang Seng range-trading reflects this — markets price in truce renewal probability but not strategic alignment, because strategic alignment is not on offer.
- No deal, no alignment: Russia is the anomaly in the post-Liberation Day map — tariffs are irrelevant, bilateral trade negligible. The relationship is defined by Ukraine sanctions, NATO posture, and now the Iran conflict.
- Iran war windfall: The Hormuz closure and global oil price spike delivered a revenue windfall. Russian Urals crude surged from $40/bbl in February to $121 on March 20, briefly trading at a premium to Brent. Daily oil revenue doubled to ~$270mn.
- Orbán’s ouster: Hungary’s new Tisza government removes Russia’s most reliable EU internal interlocutor. Previously Orbán blocked Ukraine aid packages and maintained direct ties with Putin. The political map of Europe has shifted against Moscow’s lobbying interests.
- North-South trade route: Russia and Iran were actively developing a north-south trade corridor to bypass Western sanctions. Iran’s war damage and ceasefire may delay this project.
- Trump posture on Russia: Despite early second-term signals of a Ukraine negotiation, no deal has materialised. US-Russia relations remain adversarial on Ukraine, NATO expansion, and energy sanctions.
- Market implication: Russian equities (MOEX) not in the core universe — but Russian oil price is the key variable. A sustained Hormuz opening and crude normalisation cuts Russian revenues significantly. A return to conflict extends the windfall.
The market divergence and the alignment map have a domestic political dimension that matters for H2 2026: a US president with a 41% aggregate approval rating, approaching the November midterm elections with the House on a knife edge and the Iran war still unresolved, is a president with constrained room to escalate further or make durable trade commitments. What the polls show — and what the congressional composition signals — is directly relevant to how long the ceasefire holds, whether the Trump–Xi summit can deliver a binding framework, and how the market’s political risk pricing should be calibrated.
+47% approval
- Started at 47% — highest of either term’s opening; 2pt above 2017 inauguration (45%)
- Strong Republican enthusiasm (91% base approval) and independent goodwill (+46% independents)
- DOGE announced by executive order; Elon Musk as de facto head; “chainsaw for bureaucracy” framing popular with the base
- ICE raids begin Jan 20 — initially popular with immigration hardliners; approval on immigration 48% in early polls
44% → 42%
- DOGE fired 260,000 federal workers by March. Dismantled USAID, slashed NIH, Education Dept. Public reaction increasingly negative outside the base
- Liberation Day (Apr 2) tariff announcement and market selloff widens disapproval. Quinnipiac shows 41% approval — lowest of second term at that point
- Economy approval falls from 49% (Feb high) to 43% by April. Inflation approval drops to 39%
- Approval on foreign affairs starts declining as “Liberation Day” framing proves unpopular with independents
44% → 43%
- OBBB passes House 218–214 on July 4 weekend. 55–64% of Americans opposed the bill in multiple polls. Cuts Medicaid $880bn, extends tax cuts for wealthy
- ICE raids intensify nationally. What was a net positive issue (immigration approval +4 in March) flips to negative (–8) by late June as images of raids spread
- Approval among Trump’s 2024 voters drops to 85% from 95% at inauguration. Non-voters approval drops from 45% to 36%
- Morning Consult: approval ticks back down post-OBBB signing, erasing gains from June Iran strikes
41% → 36%
- 43-day government shutdown (Oct 1 – Nov 12) — longest in US history — triggered by Democratic refusal to fund OBBB’s Medicaid cuts. Congressional approval crashes to 15%
- AP-NORC: 62% disapprove of Trump during shutdown. Gallup hit 56% disapproval. Economy approval falls to 33%
- Epstein files controversy: Nov 12 — House Oversight Democrats release emails with Maxwell/Epstein referring to Trump. Nov 19 — Epstein Files Transparency Act signed. Dec 19 — DOJ releases files, but heavily redacted, drawing bipartisan criticism
- Trump loses 6 approval points in Morning Consult following Epstein releases; subsequent Jan 30, 2026 release mentions Trump on Epstein’s plane in the 1990s
- Silver Bulletin net approval: –13 entering 2026
41% → 44%
- Shutdown ends Nov 12 after compromise deal. Approval partially recovers through December
- S&P 500 record high Dec 24 (6,932) provides positive economic backdrop narrative
- DDHQ: 44.1% approval mid-December vs 41.9% one month prior — a net 5.2% swing
- RCP aggregate: 43.9% approval / 53.4% disapproval entering January 2026
44% → 35%
- Iran war (Feb 28) triggers fastest approval decline of either term. YouGov/Economist: 39% in late February → 35% by mid-March
- Gas prices cross $4/gallon for first time since 2022. Economy approval hits career low 31% (CNN, Apr 1). Inflation approval 27% — career low
- Independents: approval drops from 46% (Jan) to 22% (late March) — the most dramatic independent collapse of either term
- Reuters/Ipsos: 36% approval (March). Fox News disapproval: 59% — highest of either term. Silver Bulletin net: –17.5 (second-term low)
- 84% of Americans express general concern about escalation of the conflict
- Republican base erodes: –6 points to 76% approval among 2024 voters; –5 points to 81% among Republicans overall
~41%
- RCP aggregate: 41.4% approval / 56.6% disapproval. Silver Bulletin net: –16.6 — essentially unchanged from ceasefire announcement
- CNN (Apr 1): overall approval 35%, economy 31% — both at second-term lows despite ceasefire optimism
- Economy damage is sticky: 2/3 of Americans say Trump’s policies worsened conditions — up 10pts since January
- Midterm implications: Democrats leading 51–44% in market predictions for House control. Republicans hold Senate advantage (22 of 35 seats up are Republican-held)
- Key Republican concern: strong disapproval (46% in Rasmussen) drives turnout — intensity is running against the president heading into November
The Liberation Day chart is a 12-month stress test of which equity markets had the structural composition to absorb two sequential shocks and which did not. The 21-point divergence between S&P 500 (+24%) and Nifty 50 (+3%) maps directly onto energy import exposure and trade deal speed — both structural variables, not noise.
The alignment audit adds a dimension the pure performance data cannot show: the difference between alignment and compliance. The UK is aligned. China is compliant. India was reluctant-compliant then partially pivoted. Europe is aligned with caveats its own officials publicly stated. Russia is adversarial but accidentally enriched by the conflict it didn’t start.
The approval data frames the political constraint the market is pricing. A president at 41% approval with midterms in six months has every incentive to close deals — ceasefire, China summit, India BTA — before November. That incentive is bullish for the short-term relief rally. But deal durability and structural depth are separate questions: the May Trump–Xi summit’s outcome will be the best forward indicator of how much of this relief trade deserves to be permanent, and how much is a pre-election window dressing.
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