The short-term reaction of financial markets to the U.S. trade tariff announcement

We analyze the reaction of global markets to the US tariff announcement of April 2, 2025. The study utilizes daily prices from 20 stock market indices that account for the largest US trade. The indices are obtained from S&P Capital IQ Pro and span the period from January 02, 2024, to May 28, 2025. The aim of the study is to evaluate the impact of the tariff announcement on the market volatility levels, correlation patterns, and market connectedness. To ensure robustness of the findings, we employ methodological triangulation, incorporating the combined use of network theory and visual techniques. The GARCH model is used to show the change in conditional volatility after the announcement. Correlation heat maps and minimum spanning tree graphs are used to interrogate the correlation among the indices. The Quantile Vector Autoregression (QVAR) model is utilized to assess changes in connectedness. The study contributes to our understanding of how global markets respond to tariffs, and the importance of emerging markets as volatility transmitters. The results show that conditional volatility increased roughly two-fold post-tariff, the correlations have become significantly higher post-tariff, and markets are more interconnected. Brazil, Canada, South Africa and Vietnam emerge as the main transmitters, possibly due to regional trade shifts, while the US become less central. These findings indicate an increase in systemic risk in the global markets and underscore the need for de-escalation of the trade conflict and the pursuit of a negotiated resolution.