As we close out the month, markets are poised to end on a stronger note. Investor anxiety over a renewed tariff war has eased, following a U.S. Trade Court ruling that seeks to block President Trump’s use of “Liberation Day” tariffs. However, we caution against complacency. While headlines have focused on tariffs, a more consequential development is quietly advancing through Congress: Section 899 of the “Big Beautiful Bill.”
Tariffs: Relief or Reprieve?
Markets initially sold off on Trump’s latest tariff threats but quickly recovered. Investors appear to be calling the administration’s bluff. Yet, this legal setback may not be the end of the story. If history is any guide, the administration could pivot to alternative tools—possibly more aggressive and less transparent—to maintain pressure.
Section 899: The Real Market Risk
While the market celebrates the tariff ruling, Section 899 could have far-reaching implications for global capital flows. This provision introduces retaliatory taxation on foreign holdings of U.S. assets, effectively weaponizing U.S. capital markets.
Section 899 introduces a new tax on income earned by foreign investors from U.S. assets—like Treasury bonds, stocks, and real estate—if their home country is labeled as “discriminatory” by the U.S. Treasury.
Why It Matters
Higher Taxes for Foreign Investors
A 20% tax on U.S. investment income for those from “discriminatory” countries.
Less Incentive to Buy U.S. Assets
Foreign investors might pull back from buying U.S. Treasuries, reducing demand.
Higher U.S. Borrowing Costs
The U.S. may need to offer higher interest rates to attract debt buyers.
Global Retaliation Risk
Other countries might respond with their own taxes on U.S. investors.
Foreign Capital Plays a Critical Role
Policies like Section 899 are potentially disruptive.
Portfolio Positioning Update
As we head into June, our portfolio positioning remains cautiously on the sidelines. While markets have shown resilience, we believe the risks surrounding Section 899 and its potential impact on foreign capital flows warrant a measured approach.
We will continue to closely monitor developments and stand ready to adjust our positioning as greater clarity emerges.
Final Thoughts
Volatility remains elevated. While the court ruling on tariffs may offer temporary relief, the broader fiscal and legislative landscape remains fraught with uncertainty. Section 899 represents a potential inflection point in U.S. economic policy—one that could shift the battleground from trade to capital.
