Trump's Trade War Salvo Shakes Global Markets

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Investors flocked to the dollar, dumped stocks, and expressed concerns over inflation on Monday as they scrambled to assess the risks of a trade war following President Donald Trump’s new tariffs on key U.S. trading partners. Trump's announcement of additional tariffs — 25% on imports from Mexico and Canada, and 10% on Chinese goods — lacked detail but were set to go into effect on Tuesday, shaking up markets that had previously assumed Trump was bluffing. 

The market selloff extended beyond Canada and Mexico, affecting cryptocurrencies, global stocks, and even the typically safe-haven yen, as investors tried to predict Trump's next move. Concerns over the economic toll from the inflationary impact of these tariffs, coupled with uncertainty over how the Federal Reserve might respond, led to a broad market retreat, with the exception of the dollar and long-term U.S. Treasuries.

"Trump's trade war has started," said Alvin Tan, RBC Capital Markets' head of Asia currency strategy, noting the U.S. dollar’s strengthening as a result of these actions. The dollar gained as investors expected countries hit by tariffs to devalue their currencies to mitigate the impact. On Monday, the euro dropped 1.3% amid fears that Europe could be next on Trump's tariff list. The Canadian dollar hit a 20-year low, China's yuan weakened in offshore markets, oil prices surged, and U.S. equity futures fell around 2% due to concerns over the impact on corporate profits.

Despite Trump’s comment that the tariffs would cause "short-term" pain for Americans, he maintained that the tariffs would "definitely happen" with the European Union, though he didn’t specify when. In the face of these widespread tariff threats, the dollar gained strength at the expense of U.S. trade partners' currencies, according to analysts from Mizuho.

The long-term effects on other asset classes remain uncertain. Stock markets fell as analysts, including those from Barclays, anticipated negative impacts on U.S. corporate earnings and uncertainty regarding global responses. Canada has already announced retaliatory tariffs, and Mexico is preparing its own countermeasures.

Mizuho analysts warned that equity investors who had been betting on Trump’s policies boosting stock markets may soon face a rude awakening as tariff retaliation escalates and growth and earnings are negatively impacted. Asian stocks in Hong Kong, Tokyo, Sydney, Seoul, and Taipei saw losses of around 2%, and European futures also dropped 2.8%.

“There’s a possibility that many investors underestimated Trump’s resolve on tariffs, expecting more negotiations and not immediate action,” said Tareck Horchani, head of prime brokerage dealing at Maybank Securities. He noted that many investors had already built positions in dollars and gold in recent weeks, but the speed with which Trump moved may have caught them off guard.

Uncertainty surrounding the duration and purpose of the tariffs added to investor anxiety. While some still hope for a resolution or that the tariffs will be rolled back if Trump achieves his objectives, the rationale behind the tariffs remains unclear. Trump has linked the tariffs to issues like the flow of migrants and fentanyl into the U.S., and both China and Mexico have rejected the idea of taking responsibility for these problems.

China, currently on its Lunar New Year holiday, said it would challenge the tariffs at the World Trade Organization and take unspecified countermeasures. Rick Meckler of Cherry Lane Investments expressed skepticism, saying such broad tariffs, especially tied to social policy, tend to backfire. "A full reaction won't come until it’s clear that this is indeed the policy," he said.

Meanwhile, bond markets are caught between the potential inflationary effects of higher consumer prices and the possibility of rate cuts due to the negative growth impact, which could be beneficial for bonds. As a result, the 10-year Treasury yield fell slightly by 4.5 basis points to 4.52%.

 

 

 

 

 

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