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European and Asian stocks rocketed higher on Thursday after Donald Trump paused his “reciprocal” tariffs, but Wall Street and its international rivals could still have a long way to fall.

The US president’s trade war unleashed a wave of panic selling in financial markets across the world, and it’s one that could yet be reignited.

Here’s why the turmoil on financial markets is likely to be far from over.

The world is still being hit with tariffs

Trump may have climbed down from the harshest of his import taxes but economies will still face higher duties, at least in the short term.

The US still has in place its blanket 10pc tariff on all trading partners.

Sanjay Raja, senior economist at Deutsche Bank, said: “What does the tariff reprieve mean for the UK? In short, not very much.

“Direct tariffs placed on UK exports remain unchanged at 10pc. Lower tariffs elsewhere, however, will limit some of the negative external spillovers – but only marginally.”

Also in force are Trump’s 25pc levies on metals, his 25pc tariffs on cars and car parts.

Although he rowed back from this worst of his tariffs against Canada and Mexico, the two countries still face 25pc levies on goods that do not comply with the United States-Mexico-Canada Agreement (USMCA).

Meanwhile, Trump ramped up his import taxes on China from 104pc to 125pc, as he said Beijing had shown a “lack of respect” with its decision to impose 84pc tariffs against the US from Thursday.

Tiffany Wilding, an economist at $2 trillion (£1.6 trillion) bond giant Pimco, said: “Assuming all of these tariffs are implemented as initially announced, we would expect the US economy to experience recession and higher inflation, at least in the short run.

“Even if the 90-day reprieve turns into a longer stint, we still think US recession odds are 50/50.”

Many industries yet to be hit by tariffs

Trump did not impose tariffs on several key sectors when he announced his “liberation day” tariffs at the White House, avoiding goods including semiconductors, pharmaceuticals, copper and lumber.

But the president on Tuesday said the US will soon announce significant tariffs on pharma imports.

“We’re going to be announcing very shortly a major tariff on pharmaceuticals,” he said at the National Republican Congressional Committee dinner.

In response, shares in pharmaceutical companies fell on Wednesday, with AstraZeneca, one of the largest companies on the FTSE 100, losing as much as 7.7pc and rival GSK down by 7.3pc at one stage.

Goldman Sachs predicted that together with his 10pc universal tariffs, sector specific levies would increase the effective tariff rate by 15 percentage points.

Bond market red flags

The US bond market may lose its status as a safe haven in times of turmoil as Trump’s trade war raises concerns about the health of the American economy.

Investors usually hope to see bond yields fall during stock market corrections as they move out of riskier equities towards safe-haven assets. Yields fall when the price of a bond rises.

However, as stock markets fell on Wednesday, bond yields actually rose – with the US Treasury yield nearing 4.5pc at one stage.

It also helped drive a surge in the cost of government debt in Britain, with the 30-year gilt yield climbing to its highest level since 1998.

Jim Reid, an analyst at Deutsche Bank, said the move was “adding to the evidence that [US bonds are] losing their traditional haven status”.

Paul Diggle, the chief economist at Aberdeen, said uncertainty around US policy meant investors were demanding higher yields as compensation for the risk to the American growth outlook.

He added: “The US may be becoming a structurally less attractive place to invest over the long run, with tariffs reducing long-run potential growth, meaning portfolios could well hold fewer US assets in the future.”

Countries lower their growth outlooks

Economies across the world face weaker growth outlooks as a result of Trump’s tariffs, putting jobs and investment at risk.

Goldman Sachs still predicted a 45pc probability of recession in the US after the president’s climbdown on tariffs, even with its forecast of three consecutive “insurance” rate cuts by the Federal Reserve in June, July and September.

Before tariffs and even prior to Rachel Reeves’s Spring Statement last month, the OECD had already lowered its forecast for UK growth to 1.4pc this year and 1.2pc in 2026, down from 1.7pc and 1.3pc.

Yet investors and economists are rapidly reassessing their forecasts to account for the changing trade landscape.

Jamie Dimon, the chief executive of JP Morgan, said that a recession in the US was a “likely outcome” .

Economists at the Wall Street bank lowered their UK growth forecast this year from 1.1pc to 0.6pc “due to a tariff-driven trade shock and weaker sentiment”.

Clare Lombardelli, a deputy governor of the Bank of England, has said US tariffs will “depress” UK growth, adding that the impact on inflation is still unclear.

Nations could retaliate further

It is an open question about how deep the trade war could go as the US and China exchange tit-for-tat rises in import taxes.

So far, the uncertainty about the level of retaliation – and hopes for a deal – have prompted wild swings in stocks.

The US president’s decision to follow through on his 104pc tariffs against China saw the benchmark S&P 500 turn a gain of more than 4pc on Tuesday into a loss of 1.6pc.

After Trump’s tariffs pause, the S&P had its third-best day since 1940, closing 9.5pc higher, days after it risked entering bear market territory. The FTSE 100 surged at its fastest pace in five years on Thursday.

While China urged the US to meet it “halfway” in negotiations, its commerce ministry still promised to “fight to the end”.

Peter Kim, of KB Securities, said: “As far as US and China goes, we are well and truly into the game of chicken.

“Trump has made his move and China has retaliated rather than choosing the path of compromise and it’s now up to which country is going to blink first. That’s very dangerous.”

While Sir Keir Starmer has said he favours pushing for a trade deal with the US rather than retaliation, the Prime Minister has also insisted that “all options are on the table”.

Meanwhile, the EU has put itself back into the US president’s sights after announcing tariffs on €21bn (£18.1bn) worth of American goods in response to metal tariffs announced last month.

Dave Sekera, the chief US strategist at Morningstar, said: “Trade negotiations have yet to start and once they do, there will be positive and negative headlines as each party positions itself to extract the maximum amount of concessions possible.”

Investors are still scared

Currency markets indicated that investors were turning their attention to the risk of US recession, with the dollar plunging 1.5pc against the euro and 1pc versus the pound, which was worth more than $1.29.

Do not forget, many stock markets fell into bear territory after “liberation day”, including the Nasdaq in New York, Nikkei in Tokyo and Seoul’s Kospi.

Generally defined as a 20pc drop from an index’s recent high , they typically trigger a spiral of selling as traders and investors lose confidence.

Earlier this week, Wall Street’s so-called “fear gauge” – known as the Vix – surged to its highest level since August last year as Trump’s tariffs upended the global order.

Mohit Kumar, the chief Europe economist at Jefferies, said volatility would “remain high” as China and the US continue “a tough posturing stance”.

He said: “My view remains that this is a battle that Trump cannot win and will need to back down. I think a deal will be eventually reached but in a way that both parties can claim victory to their respective electorates. But the path will be through more pain.”

And warning lights are already beginning to flash in the data.

Tim Moore, the economics director at S&P Global, said closely watched PMI data on Britain’s dominant services sector showed businesses “remained cautious about the near-term outlook, with optimism still among the lowest seen over the past two years”.

He said: “Worries about increasing wages and the impact of forthcoming US tariffs were the most cited challenges in March.”

Small businesses to suffer heavy blow

While attention has been on the sharp falls in stock markets, small businesses are likely to suffer the worst effects from the global trade war.

Many small firms are less able to swallow the sharp increase in the cost of goods after tariffs are levied on imports. They are also less able to take advantage of economies of scale as well as harder hit when lending conditions dry up.

Bill Ackman, the billionaire hedge fund boss, has urged the president to halt his tariffs to avoid small businesses going bankrupt. The prominent financier and one-time Trump supporter said medium-sized businesses would be next to go under unless the US paused tariffs for 90 days.

“I am receiving an increasing number of emails and texts from small business people I do business with or have invested in, expressing fear that they will not be able to pass on their increased costs to their customers and will suffer severely negative consequences,” Ackman wrote on X.

In the UK, an index of financial conditions compiled by RSM UK showed that Mr Trump’s tariffs ended a two-year recovery in the level of financial stress in the UK’s money, bond, equity and foreign exchange markets.

It is now on the verge of “restrictive” territory, signalling growing economic pressure on British exporters.

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