Trump’s Tariff Tactics Shake Global Markets

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Financial markets, which had previously bet on avoiding trade wars, are now adjusting to the increased risk of a sharp global slowdown, renewed inflation concerns, and a possible halt to Federal Reserve rate cuts. This shift comes after Donald Trump announced new tariffs on key U.S. trading partners.

Over the weekend, the U.S. president imposed additional levies of 25% on imports from Mexico and most Canadian goods, along with a 10% tariff on Chinese imports. Markets, which had largely dismissed Trump's threats as political posturing, were caught off guard.  

Initial market turmoil eased after Trump announced a one-month delay on Mexico's tariffs to allow for negotiations. The U.S. also postponed tariffs on Canadian imports. However, uncertainty remains high, as Trump has a track record of shifting his stance when he achieves favorable deals.  

Art Hogan, Chief Market Strategist at B. Riley Wealth, described the situation as a "loaded but unfired tariff gun," warning that moving forward aggressively could destabilize markets. Following discussions between Trump and Canadian Prime Minister Justin Trudeau, Canada’s retaliatory tariffs were also put on hold, which briefly boosted the Canadian dollar.  

China, which was on holiday when the tariffs were announced, vowed to challenge the measures at the World Trade Organization and take countermeasures. The Canadian dollar, after hitting a 20-year low, rebounded to C$1.4428 per U.S. dollar. Meanwhile, Mexico’s peso initially fell to a three-year low before recovering by 1.35% against the dollar after the tariff pause was announced.  

Despite the short-term market swings, Pramol Dhawan of Pimco sees Mexico as a long-term beneficiary. He noted that Mexico’s government has aligned with the U.S. by restricting Chinese textile imports and intensifying efforts to combat migration, fentanyl, and drug trafficking. Unlike during Trump’s first term, Mexico’s authorities are now prepared to negotiate and collaborate with the U.S.  

The euro briefly dropped more than 2% before stabilizing, and China’s offshore yuan edged up by 0.05%. Stock markets from Asia to Europe initially slumped, but U.S. and European stocks pared losses after the tariff pause, with the Dow Jones Industrial Average even moving into positive territory.  

Some analysts warn that Canada and Mexico could face recession risks, while the eurozone economy may stagnate if Trump expands tariffs to Europe. Meanwhile, concerns over rising U.S. inflation have led investors to reconsider monetary policy expectations. Boston Federal Reserve President Susan Collins cautioned that tariffs could drive inflation higher, while Atlanta Fed President Raphael Bostic emphasized the need for a cautious approach to further rate cuts.  

Market expectations for a 25-basis-point rate cut in June dropped to 60.6%, down from 76.9% a week prior. However, traders slightly increased bets on European Central Bank (ECB) rate cuts, now pricing in about 86 basis points of easing by year-end.  

Trump has confirmed that tariffs on the European Union are inevitable but has not provided a timeline. Keith Lerner, co-chief investment officer at Truist Advisory Services, noted that markets must adapt to unpredictable swings, warning that if Trump never follows through, markets may stop taking his threats seriously.  

Deutsche Bank's George Saravelos warned that tariffs on Canada and Mexico could disadvantage U.S. manufacturers, increasing pressure to impose tariffs on Europe. Florian Ielpo of Lombard Odier estimated that a 10% tariff could cut eurozone growth by 0.3 percentage points unless the euro weakens proportionally, while a 20% tariff could halve growth expectations.  

Despite the uncertainty, debt markets remained stable, as investors consider the likelihood of prolonged tariffs to be low. An industry executive stated that short-term tariffs would have minimal impact, but if they persist for eight or nine months, they could trigger a recession.  

Nomura analysts warned that a "tit-for-tat" tariff escalation could further weaken global currencies. If the ECB cuts rates to 1.5%, the euro could drop to $0.98–$0.99, assuming the Fed keeps rates unchanged. China's yuan is also expected to weaken, although the Wall Street Journal reported that China has pledged not to devalue its currency.  

U.S. stocks appear vulnerable, as analysts predict tariffs will weigh on corporate earnings while the S&P 500 remains highly valued. Morgan Stanley’s Michael Wilson believes tariffs reinforce a preference for service industries like financials, software, media, and consumer services. The S&P 500 ended down 0.76%, after initially falling as much as 1.9%.  

Despite the temporary tariff reprieve, investors expect continued volatility. Olivier d’Assier of Simcorp noted that market participants lack a clear strategy to respond quickly to Trump’s shifting policies, making it difficult to anticipate the next move.

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.