Three reasons why

Daily update

US President Trump has retreated from their threat to aggressively tax US consumers of European products, delaying the suggested 50% tariff to July. These retreats are so frequent that investors should rationally expect them. So why do markets still react to the initial announcements, as happened last Friday?
First, even if no one thinks the threats will be carried out, firms will need to put in place some insurance. For instance, supply might be diverted from other markets to the US to build stockpiles before a threatened tariffs. Taking out insurance against low probability events still incurs a cost.
Second, wild swings in policy making increase risks in markets—and a general sense of unpredictability requires a risk premium. In addition investors perceive two factions on trade policy—the conventional and a more radical faction. Aggressive tariff policies suggest the radical faction is dominating Trump, and markets favor the conventional over the unpredictable.
Third, aggressive tax increases are sensational and attract media coverage. The retreats are rather more mundane. This may shape consumers’ perceptions of policy, if the potential damage of tariffs is remembered and Trump’s retreats are forgotten. If consumers blame price increases on tariffs that may not actually materialize, it opens the way to more profit-led inflation by retailers.