Trump Presses Ahead with Tariffs. What Now?

Over the weekend, Trump issued executive orders to impose a 25% tariff on the majority of imports from Canada and Mexico and an additional 10% levy on all imports from China. Mexican energy imports will be subject to the full 25% duty, but duties on Canadian oil imports will be much reduced to 10%. President Donald Trump also reaffirmed his stance warning to increase tariffs on the EU citing the "tremendous deficit" with the EU. Additionally, he declared that he would "eventually" impose taxes on pharmaceuticals, steel, copper, aluminium, and semiconductors.

As expected in response, the Canadian government has announced a 25% duty on some US imports starting from February 4. Canada is also considering putting some restrictions on vital mineral and energy exports to the US. Mexico has also wowed punitive actions with tariff and non-tariff measures in response. China condemned the tariff hikes, claiming they were against international trade regulations. It also said it would contest the levies at the WTO and take "countermeasures," which have not yet been defined.

How Has the Market Reacted, So Far!

Investors did not take Trump's tariff threats seriously until Friday, which is why the initial market reaction to the news has been so negative. Some market participants continue to believe that these tariffs are a negotiating weapon, and they may be lifted if they believe that their trading partners are complying. In that context, Trump's remarks on Friday, relating the tariffs to the US's bilateral trade imbalances and implying that they were "purely economic," are more worrisome. Deficits are more a complicated beast and are not as easily "negotiated" away as other non-trade issues including drug trafficking and immigration.

How significant the market reaction will be to the announcement will depend on how sustainable and effective these tariffs are and whether they are quickly rescinded as an agreement is reached or if will this lead to a tit-for-tat measure by the trading partners and lead into an all-out trade war. As of Monday morning, in the markets–

Source: Bloomberg

• Currencies. USD and JPY have both straightened. The dollar has traded about 1.5% higher versus the Canadian dollar and the euro. The Mexican peso is expected to gap lower versus the USD on the open. The Chinese renminbi has remained firm for now, but China is on holiday until Wednesday.
• Equities. Following Friday's losses, US futures have plummeted this morning (S&P 500 futures -1.93%, Nasdaq futures -2.46%, and Dow futures -1.0%). As the market gets ready for a big earnings week that includes Alphabet, Amazon, AMD, and Palantir, as well as Friday's Nonfarm Payrolls report, volatility may continue to be a focus. European markets began the day significantly lower, with the STOXX 50 down 2.4%, but by lunchtime, they had levelled off at 11 a.m. London time, the German DAX was down 1.7%. Asian stocks plummeted with South Korea's KOSPI down 2.5%, and Japan's Nikkei fell 2.7%. Chinese markets closed for the Lunar New Year holiday but are set for tumultuous reopening on Wednesday
• Bonds: US treasury yields have been rangebound so far, possibly caught between the risk of inflation and their attraction as a safe haven, which prevented an early sell-off. On the other hand, European rates plummeted on Friday and opened significantly lower following the unexpected decline in German inflation.
• Commodities: Oil is the only notable asset class that traded higher on Monday morning on concerns that tariffs will lead to higher gasoline and diesel costs at the pumps. Meanwhile, gold attracted fresh safe-haven demand, reaching record highs.
• Crypto. Cryptocurrencies suffered over the weekend. Bitcoin -3.44% ($94,321), Ethereum - 12.72% ($2,517), XRP -10.06%),

Where Should Investors Focus?

The recent round of tariffs and the looming threat towards the EU are likely to keep volatility high in the coming weeks, at least until investors have a better idea of where US trade policy is headed.

More volatile markets require an increased focus on portfolios. Within equities, investors should look at larger companies with strong cash flows and maintain focus in the US. It is still too early to bottom fish, and capital preservation should be the key. At the same time, high-quality bonds including US Treasury and German bunds offer some insulation against uncertainty and can help diversify portfolios.

Currency markets are likely to react strongly to changes in trade policy, giving investors the chance to take advantage of volatility spikes to increase portfolio income. While trade uncertainty is still quite high, the euro is likely to remain under pressure over the next few months. Swiss frac’s fortunes are closely tied to the euro, so is likely to remain weak against the USD. Sterling might end up strangely winning all of this, particularly if Starmer were to strike a deal with the US. All things considered, the strength of the US dollar is expected to persist in the near future and possibly throughout 2025.

DXY Index

Source: Bloomberg

Gold also remains an effective hedge against geopolitical and inflation risks. Oil could also remain well bid in the near term.

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