Trump’s tariffs shake markets as investors brace for trade war

February 03, 2025 (MLN): Investors bought dollars, sold stocks and fretted about inflation on Monday in a scramble to assess the risk of a trade war after Donald Trump put tariffs on top U.S. trading partners.

Trump's orders impose additional levies of 25% on imports from Mexico and most goods from Canada, as well as 10% on goods from China.

The details are light, but the tariffs take effect on Tuesday and have jolted markets that had assumed he was mostly bluffing.

The selloff extended beyond Canadian and Mexican markets and stocks directly affected by the tariffs, as Reuters reported.

It also hit cryptocurrencies, stocks, and even the safe-haven Japanese yen, as investors tried to anticipate the volatile president's next moves.

Worries about the impact of widespread tariffs on growth, due to inflationary pressure and uncertainty for the Federal Reserve, played a role.

This led to the selling of everything except the dollar and long-term U.S. Treasuries.

"Trump's trade war has started," said Alvin Tan, head of Asia currency strategy at RBC Capital Markets in Singapore, noting it was hard to see the U.S. dollar retreating any time soon.

The dollar has been the main mover, gaining as Trump headed for and then won office because investors figured tariff-hit countries would weaken their currencies to offset the impact.

On Monday, the euro fell 1.3% on fears Europe may be next on the tariff list.

Canada's dollar skidded to a 20-year low on the greenback, China's yuan slid in offshore trade, oil jumped, metals slumped and U.S. equity futures dropped about 2% on risks to U.S. companies' bottom lines.

Trump said the tariffs may cause "short-term" pain for Americans.

While he planned to speak on Monday with the leaders of Canada and Mexico, who have announced retaliatory tariffs, he downplayed expectations that they would change his mind.

He said tariffs would "definitely happen" with the European Union, but did not say when.

"Against the backdrop of sweeping tariff threats set to expand even more, the dollar has gained at the expense of currencies of U.S. trade partners," Mizuho analysts wrote.

The longer-run implications for other asset classes is less clear.

Stocks fell as analysts, including those at Barclays, expect a drag on U.S. company earnings and uncertainty over how the rest of the world will respond.

Canada has already imposed retaliatory tariffs, and Mexico has signaled a response.

Mizuho said equity bulls are re-evaluating their Trump trades.

"Equity bulls seduced by 'Trump is good for equities' narrative are subject to a rude wake-up call from the potentially jarring impact on growth/earnings amid retaliatory tariff spirals," Mizuho said.

Shares in Hong Kong, Tokyo, Sydney, Seoul and Taipei made losses around 2%. European stock futures slid 2.8%.

"I don't believe market participants have fully grasped the extent of the potential fallout yet," said Tareck Horchani.

He noted that this is especially true as responses from affected countries unfold.

He said many investors had built positions in dollars and gold in recent weeks but may still have been surprised by how quickly Trump's threats turned to action this time around.

"It's possible that some investors underestimated Trump's resolve on tariffs, expecting more negotiation rather than immediate action."

The difficulty in assessing the effect of tariffs is because their duration and precise rationale remain unknown.

Some investors still believe some sort of deal is possible or that tariffs will be quickly dismantled if Trump gets what he wants.

Trump has linked the tariffs to the flow of migrants and drugs particularly fentanyl into the U.S. and demanded crackdowns in Canada, China and Mexico.

China and Mexico have said fentanyl is America's problem, so prospects of a breakthrough are unclear.

China, still closed on Monday for the Lunar New Year holidays, said it would challenge Trump's tariffs at the World Trade Organization and take unspecified countermeasures.

"These generalized tariffs, which cover a much wider range of products and are targeted toward social policy, have usually proven to be a mistake," said Rick Meckler.

He is a partner at Cherry Lane Investments in New Vernon, New Jersey.

"I think that's why the market has looked at this sceptically, and with anxiety, all along," he said.

"A full reaction won't be reached until it's clear this is the policy, however."

Debt markets, meanwhile, seem caught between the negative inflationary implications of higher consumer prices and the potential for rate cuts due to the hit to growth which ought to be positive for bonds.

Benchmark 10-year Treasuries rallied slightly, pushing yields about 4.5 basis points lower to 4.52%.

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