Trump's 50% EU Tariff Threat Sends Oil Prices Down 3%

Oil prices continued their downward trend this week, as U.S. President Donald Trump threatened to impose a 50% tariff on goods from the European Union. Brent crude oil fell below $64 per barrel, marking the fourth consecutive day of decline, with a weekly drop of nearly 3%. Trump, in a post on Truth Social, described the EU as "very difficult to deal with" and suggested that a 50% tariff on EU goods should be implemented starting June 1.

This threat has reignited market concerns about a potential trade war, which could slow down the global economy and reduce oil demand at a time when oil supply is increasing. Oil prices have been pushed lower this week as representatives from OPEC and its allies discussed the possibility of significantly increasing production quotas, although no agreement has been reached yet.

Ole Hansen, head of commodity strategy at a major bank, noted that oil prices fell by $1 after Trump's latest threat, as risk sentiment was dampened. The potential for a trade war could exacerbate the already fragile global economic outlook, further pressuring oil prices.

The threat of tariffs poses a dual challenge for U.S. small banks, which are already grappling with inflation and sluggish economic growth. The combination of these factors, along with the U.S. government's aggressive stance on global trade and rising budget deficits, could exacerbate the pain for these institutions. The situation is reminiscent of the "unrealized losses" that plagued U.S. banks in 2022 and 2023, when rising interest rates led to the collapse of several banks, including Silicon Valley Bank.

Unrealized losses refer to the difference between the market value of an asset or security and its purchase price, which has not yet been realized through a sale or liquidation. These losses can increase a bank's vulnerability, especially during times of stress, and may lead to a run on the bank if depositors lose confidence.

As the U.S. government pushes forward with tax cuts and the Treasury Secretary issues further tariff threats, concerns about the U.S. economic outlook have intensified. The latest quarterly data from the Federal Deposit Insurance Corporation shows that unrealized losses on bank bonds reached $482 billion in the fourth quarter of 2024, an increase of $118 billion since September. Regional, small, and community banks bear nearly half of these losses.

While unrealized losses do not directly impact a bank's financial health, they can exacerbate vulnerabilities during times of stress and increase the risk of a bank run. Two years ago, the Federal Reserve implemented a special program to end the banking crisis. If the White House's policies lead to stagflation, the U.S. may once again rely on the Federal Reserve to bail out small banks through similar measures. Therefore, the White House should carefully consider its actions and avoid further entanglement with Federal Reserve Chairman Jerome Powell.