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Matteo Marchetti
Analysis, Thoughts & Insights | February 4, 2025

The Unfinished Trade War: Delays, Retaliation, and Growing Uncertainty

Over the past weekend, President Donald Trump announced significant tariffs on imports from Canada, Mexico, and China, marking a pivotal shift in U.S. trade policy. These measures are poised to have immediate and far-reaching effects on global financial markets.

Details of the Tariffs

Initially set to take effect on February 4, 2025, the U.S. planned to impose a 25% tariff on all imports from Canada and Mexico, with a reduced 10% tariff specifically on Canadian energy resources. Imports from China were to face a 10% tariff. The administration cited the need to address issues such as illegal immigration and the influx of fentanyl as primary motivations for these tariffs.

However, following negotiations between the parties, the U.S. administration decided last night to delay the imposition of tariffs on Canada and Mexico by one month. This delay reflects a temporary easing of tensions, although the underlying trade issues remain unresolved.

In a retaliatory move, China has imposed its own set of tariffs on U.S. goods, escalating the trade tensions and adding another layer of complexity to the global economic landscape.

Immediate Market Reactions

The announcement and subsequent developments have sent ripples through global markets:

  • Equity Markets: U.S. stock index futures experienced significant declines following the initial announcement, with Nasdaq futures dropping by 2.35% and S&P 500 futures by 1.8%. Asian markets also reacted negatively, with indices such as Hong Kong’s Hang Seng, Japan’s Nikkei 225, South Korea’s Kospi, and Australia’s ASX 200 all closing lower. European markets followed suit, with the UK’s FTSE 100 and the Stoxx 600 both down. The delay in tariffs on Canada and Mexico provided a modest rebound, though market sentiment remains cautious amid escalating tensions with China.
  • Fixed Income: The market reacted with a flattening of the yield curve, characterized by higher rates on the short end and relatively stable long-term rates. This suggests that markets anticipate ‘higher rates for longer’ due to potential inflationary pressures, but also harbor concerns about long-term economic growth. The retaliatory tariffs from China have further complicated the outlook, introducing additional risks to global economic stability.
  • Currency Markets: The U.S. dollar strengthened, reaching a 22-year high against the Canadian dollar. The Canadian dollar hit a 20-year low, while other currencies like the euro, Mexican peso, and China’s yuan weakened against the dollar. The delay in tariffs on North American neighbors provided some relief to the Canadian and Mexican currencies, but the yuan remains under pressure due to heightened U.S.-China tensions.
  • Commodities: Gold prices are poised to hit new highs amid increased safe-haven demand. Oil prices, initially volatile due to concerns over global trade disruptions, saw some stabilization following the delay in North American tariffs but remain vulnerable to fluctuations driven by the broader trade conflict, particularly with China.

Potential Impacts on Key Financial Assets

  1. Equities: The tariffs are expected to pressure corporate earnings, especially for companies with significant exposure to Canada, Mexico, and China. Goldman Sachs estimates that the S&P 500’s earnings per share could decrease by 1% to 2% for every 5-percentage-point increase in tariff rates, potentially leading to a 2% to 3% decline if the tariffs persist. The retaliatory measures from China add to the downside risks for multinational corporations.
  2. Fixed Income: The potential for increased inflation due to higher import costs may lead to a rise in bond yields as investors demand higher returns to compensate for decreased purchasing power. However, if the tariffs significantly slow economic growth, there could be a flight to safety, driving yields lower. The evolving situation with China could exacerbate these dynamics.
  3. Currencies: The U.S. dollar’s strength may continue in the short term as investors seek safe-haven assets. However, prolonged trade tensions, especially with China, could lead to concerns about the U.S. economy, potentially weakening the dollar in the long run.
  4. Commodities: Oil prices could face downward pressure due to anticipated global economic slowdown, while gold is likely to benefit from increased demand as a safe-haven asset. The impact of China’s retaliatory tariffs could further influence commodity markets, particularly in sectors heavily reliant on U.S.-China trade.

Broader Economic Implications

Economists warn that these tariffs could lead to higher consumer prices in the U.S., exacerbating inflationary pressures. The increased costs of imported goods may be passed on to consumers, affecting a wide range of products from electronics to automobiles. Additionally, the tariffs could disrupt supply chains, leading to inefficiencies and further cost increases.

In response, Canada and Mexico have announced plans for retaliatory tariffs on U.S. goods, though the recent delay may alter their approach. China’s imposition of retaliatory tariffs significantly escalates the trade dispute, posing new challenges for U.S. exporters and increasing the risk of a broader economic slowdown.

Conclusion

As the week unfolds, investors should brace for heightened volatility across financial markets. Close monitoring of policy developments and corporate responses will be crucial in navigating the evolving landscape shaped by these significant trade policy shifts.

The real risk that markets—and perhaps even President Trump—may be underestimating is the potential for a protectionist escalation from the countries targeted by these tariffs. While the current U.S. administration may anticipate limited or negligible retaliatory measures from Canada, Mexico, and China, such an assumption carries significant risks. The retaliatory tariffs imposed by China highlight the possibility of a rapidly escalating trade conflict. Should these nations respond with further countermeasures, the situation could quickly escalate, posing substantial threats to global economic growth and corporate earnings. The ripple effects of a full-scale trade dispute would likely extend beyond the immediate impact of tariffs, affecting supply chains, investment decisions, and overall market stability.

It is also important to note that President Trump has yet to disclose his tariff strategy concerning the European Union and potentially the United Kingdom. This leaves room for further developments, suggesting that the current phase of trade-related surprises may be far from over. As a result, heightened market volatility could persist throughout the year, driven by ongoing uncertainty surrounding future policy decisions.

 

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