Markets have been weaker midday Wednesday because the Street is starting to realize that there is an increasing likelihood these initial salvos on steel and aluminum tariffs may indeed escalate into a wider trade conflict, something traders have been in denial about all week.

I've often said markets don't lie, but they can sometimes delude themselves. Traders have mostly believed that the threat of tariffs on aluminum and steel would not escalate into a global trade war, and, most importantly, would not threaten the stories of global growth and record earnings that together have been the reigning investment paradigm.

Is this one of those cases where the market is deluding itself?

Wednesday morning, traders kept expressing surprise that the markets were not down more. Isn't Gary Cohn's departure as the White House's top economic advisor and the steel and aluminum tariff battle worth more than a 200-point drop in the Dow?

Not if you believe that this will all blow over, that it is just limited to steel and aluminum. But the Street is slowly starting to awaken to the fact that this is a broader issue.

CNBC reported that President Trump is expected to announce specifics on the tariffs Thursday or Friday and that it will include a "broader conversation" about additional trade actions, including European cars, intellectual property theft and the trade deficit with China.

"[T]his situation is more problematic than prior steel tariffs, as it appears likely to be broader, is unlikely to be an isolated event but instead appears likely to be followed by other trade protections, and could weaken institutions like the WTO in the process," Goldman's Jan Hatzius said in a note today. "Retaliation by trading partners is likely."

In sum: the proposal to slap tariffs on aluminum and steel is clearly a sideshow to a much broader potential trade battle. The U.S. has already removed itself from the Trans Pacific Partnership (TPP), it is in very prickly negotiations over NAFTA and the ultimate target is clearly China.

Larry McDonald at ACG Analytics has already made the leap, arguing that this is "only the beginning" of a long series of trade salvos. "We're in the Denial phase," he told me. "Next comes the contagion/amplification build. Tariffs will raise inflation and reduce growth, will cut off the recovery just as it's been on a roll," adding that "we see greater vol and equity losses."

Whether it gets that bad is not clear, but what is clear is that people are no longer saying "it's not going to matter." They are looking at whether this will be "somewhat bad or very bad," as Jason Furman, the chairman of the Council of Economic Advisors under President Obama, said on CNBC.

"But you look at President Trump's tweets and you know, $800 billion trade deficit — he says it over and over again, the number isn't even right," Furman said. "He seems very, very focused on this and focused on reciprocal tariffs and all sorts of other ideas that would take this up a level, not calm it down and reduce it a level. But we'll see. We're talking about, is this somewhat bad or very bad? And that doesn't seem like a great conversation to be having."

The unfortunate part of this whole story is that it is distracting attention from the very real trade issues we have with China. Instead of building a coalition to address China's trade issues and intellectual property theft, the President is alienating the U.S. trading partners who would be part of that coalition, a point aptly made by The Wall Street Journal on Wednesday.