A legal challenge targeting the Trump administration's key tariff authority is prompting markets to anticipate a potential—though possibly temporary—rollback of trade barriers. According to trading desks, Citigroup's latest report indicates that market expectations for a Trump administration victory in the International Emergency Economic Powers Act (IEEPA) tariff case have significantly cooled. Preliminary Supreme Court hearings have shown unfavorable signals, causing prediction markets to slash the government's odds of winning from around 40% to just 27%.

Citigroup suggests that if the court ultimately overturns the "reciprocal tariffs" imposed under IEEPA, it could trigger a trading frenzy. Short-term market reactions may include: - Lower inflation expectations - A stock market rally, particularly in small-cap stocks - Strengthening of select emerging market currencies, such as the Mexican peso and Brazilian real

However, investors should remain cautious, as the government retains alternative legal avenues to reimpose tariffs, meaning any market boost from tariff removal could be short-lived.

**Court Shift: IEEPA Tariff Legal Foundation Weakens** Citigroup's report notes that during this week's first IEEPA tariff case hearing, judges' preliminary remarks were seen as unfavorable to the government. This sentiment quickly reflected in prediction markets. Data shows that on November 5, the day of the hearing, the market's perceived likelihood of a government victory dropped from ~40% pre-hearing to ~27% by close. This suggests a growing consensus that the Supreme Court may overturn IEEPA-based tariffs.

While the legal challenge progresses as a key market sentiment driver, the Trump administration has not exhausted all options. Citigroup emphasizes that even if IEEPA tariffs are invalidated, the government could pursue alternative legal measures to enforce tariffs. Treasury Secretary Bessent, present at the hearing, expressed optimism but confirmed backup plans, including: - **Section 122**: Allows broad 15% tariffs for up to 150 days. - **Section 338**: Permits tariffs up to 50% on nations discriminating against U.S. commerce. - "Licensing fees" approach: Repackaging tariffs as fees, though some judges questioned this during hearings.

Thus, even if IEEPA tariffs are blocked, the tariff threat may persist in modified forms.

**Short-Term Winners and Losers: Beneficiaries of a Tariff "Gap"** If IEEPA tariffs are overturned, Citigroup identifies the following short-term beneficiaries: - **Macro impact**: The U.S. effective tariff rate (ETR) would drop sharply. October’s ETR hit 12.5%, with projections reaching 15.3% if all agreed tariffs took effect. A reversal could pull it back to ~9%. - **Country-level winners**: Economies heavily reliant on U.S. trade and most impacted by IEEPA tariffs: - **Top beneficiaries**: Vietnam and Mexico. - **Secondary gainers**: India (currently facing 50% tariffs, potentially cut to 25% post-Russian oil sanctions). - **Least benefit**: EU and UK.

This "winner" scenario may be fleeting if the government retaliates with alternative measures.

**Trading Playbook: Markets Preview "IEEPA Reversal" Moves** For investors, the key question is how to trade this expectation. Citigroup analyzed intraday asset movements during the hearing (when IEEPA odds plummeted): - **FX markets**: Mexican peso and Brazilian real rallied, while the euro lagged—aligning with the "winners" analysis. - **Equities**: Risk-on sentiment lifted the Russell 2000 small-cap index more than the S&P 500. - **Inflation expectations**: 1-year inflation swap yields fell over 5bps, reflecting reduced tariff-driven inflation fears.