LONDON (Reuters) - The outsized swings in markets on the back of Donald Trump's every word on tariffs just weeks ago have faded to mere flickers, as investors switch their focus elsewhere, and bet against a full-scale trade war really materialising.

There is a nagging doubt for others, however, that markets could be growing complacent. 

China is one of the few trading partners on which Trump has increased tariffs, but Hong Kong's Hang Seng index is up 14% year to date, led by a surge in tech stocks. 

Similarly, traders are banking on less volatility in the Canadian dollar and Mexican peso - both slightly stronger than they were at the start of the year - and an index of European auto stocks - also vulnerable to tariffs - hit a seven-month high this week.

To be sure, they are not immune. European autos took a small knock after more tariff chatter on Wednesday, but they remain up nearly 10% in 2025, and size of the swings are less than they were.

State Street has tracked media headlines and measured them against moves in currencies and equities to get a sense of how sensitive each market has been to trade-war news. 

"A few months ago, tariffs were the key thing to look at. Now the media continues to talk about tariffs but the market is not paying attention," said Marija Veitmane, head of equity research at State Street Global markets. 

"Nearly 40% of all equity market volatility could be explained by a trade war narrative. Now it's got to less than 2%," Veitmane added.

Part of the reason is the lack of clarity over the scope, timing and targets of Trump's overall trade policy.

"We don't know, from threats to reality, what tariffs will imply," Monica Defend, head of the Amundi Investment Institute, said. "We cannot forecast with reasonable confidence."  

DISTRACTED AND DESENSITIZED?

Meanwhile, markets have moved on from last year's so-called U.S. exceptionalism narrative that framed Europe and China as tariff victims and bet on Trump's deregulation and tax cuts to safeguard U.S. growth.

The S&P 500, which rallied sharply in the weeks after Trump's victory, is up just 5% year to date, compared with a near-9% gain in Europe's STOXX 600, while the U.S. dollar has weakened against a basket of major currencies. .

Chinese tech stocks have soared as investors latch onto the buzz around AI startup DeepSeek and President Xi Jinping held a rare meeting with tech executives.

What's more, few tariffs have actually been imposed, compared with the far-reaching blanket duties Trump initially threatened. Mohit Kumar, Jefferies chief Europe economist, says markets have become "increasingly desensitized". 

"The feeling in the market is it's a negotiating tool ... and it's just too expensive to go and out and trade on headlines," he said. 

In early February, the Canadian dollar hit a 20-year low after Trump announced sweeping tariffs on Canada and Mexico. When he postponed them, the currency rebounded almost as quickly as it had fallen in its largest single-day swing in nearly five years. 

The loonie has continued to strengthen since then, with some investors and analysts now arguing this is one example of the complacency in markets.

Australian bank Westpac is recommending clients short the Canadian currency, as it is "materially under-pricing the potential for renewed tariff risks." 

Paul Mackel, HSBC's global head of FX research, said in a note there is now "little Trump policy premium in the broad dollar, if any at all. This is complacent, in our view." 

And tariffs of course could still appear.

"From Trump's perspective, you can't keep threatening (tariffs) and not doing it, because then there's no point," said Jack Janasiewicz, portfolio manager at Natixis Investment Managers.

"So one of these is going to stick, and all of a sudden we're down 5%."