US President Donald Trump has quickly installed US tariffs and Canada, Mexico and China, starting rumours of a full on trade war. But what do the experts think?
Markets are bracing for another volatile week as Trump's tariff policies take centre stage. The confirmation of 25% tariffs on Mexico and Canada over the weekend caught markets somewhat off guard, despite Trump's prior hints. The lack of a clear economic rationale behind this decision—justified primarily as a measure to curb illegal immigration and fentanyl imports—has unsettled investors, leading to a risk-off sentiment at the start of the week.
The initial market reaction has favoured safe-haven assets, with the US dollar, Japanese yen, and gold gaining momentum this morning. Equities, on the other hand, are struggling. Tariffs weigh on corporate earnings by squeezing profit margins and slowing future growth. They also impact valuations by reducing the likelihood of a Federal Reserve rate cut. As a result, major US equity futures opened lower during the Asian session. This decline comes at a time when equities were already considered overextended and expensive, with confidence still shaken from last week’s DeepSeek meltdown. The introduction of tariffs has further dampened the outlook for equities.
The ramifications of this tariff announcement extend beyond North America. Trump has also threatened tariffs against Europe, though the market reaction across the Atlantic has been more subdued. The FTSE 100 was the worst performer in early trading, opening lower but recovering some ground.
In Mainland Europe the STOXX 600 has dropped to 530 this morning as concerns over potential European tariffs weighed on investor sentiment. The move erased last week’s gains following the DeepSeek scare. However, momentum remains firmly on the upside as the index holds above 525. A dip below this level could call the bullish drive into question, as resistance may emerge once again. The pullback has also allowed the RSI to retreat into neutral territory after surpassing the overbought threshold, which could generate renewed buying interest in the coming days.
A key differentiator for European stocks compared to their US and UK counterparts is the European Central Bank's (ECB) proactive approach to monetary policy. The prospect of additional rate cuts this year improves the valuations of European companies, which are already relatively cheap on a price-to-earnings basis. A dovish ECB is likely to continue supporting European equities, as the central bank aims to mitigate the negative effects of restrictive policies on economic growth. However, inflation remains a pressing concern.
The flash CPI reading for January, released this morning, showed headline inflation rising unexpectedly once again. This development has likely exacerbated bearish sentiment in European stocks. Markets continue to price in an almost certain chance that the ECB will cut rates at its next meeting in March. However, if inflation continues to trend higher, the central bank’s flexibility may become increasingly limited.
With tariffs, inflation, and central bank policies all shaping market sentiment, European stocks are facing a delicate balance. While monetary easing from the ECB could provide some relief, persistent inflation and geopolitical uncertainty remain key risks. Investors will be closely watching upcoming economic data and central bank decisions for further clarity on the market’s direction.
The global financial landscape has been rattled following President Trump’s announcement of new tariffs, imposing a 25% import tax on goods from Canada and Mexico, alongside a 10% tariff on imports from China. Further threats of tariffs against the EU and the UK have compounded investor concerns, triggering notable stock market declines across Asia and Europe.
We had anticipated a high likelihood of US tariffs; therefore, prior to this week, we had assigned a 15% chance of a trade war with significant tariffs. This scenario would trigger economic growth to slow below 1% over the coming 9 to 12 months, while inflation remains above 3%, presenting a stagflation risk.
In financial markets, this would likely lead to a 15% sell-off in equities, with defensive and quality stocks offering the most downside protection. Given this backdrop, we would prefer US equities, bonds, and defensive currencies such as CHF and JPY. Despite these concerns, we still do not see this as the most likely scenario. We continue to assign a higher probability to a negotiated resolution or delayed tariffs, which would be a positive outcome for equities.
While these protectionist measures introduce significant short-term volatility, the long-term implications will depend on how key economies respond. Trade tensions may disrupt supply chains, impact corporate earnings, and shift investment flows, but they also present opportunities for tactical positioning.
Investors are rattled at the prospects of a full-blown trade war breaking out after the US slapped punishing tariffs on Canada, Mexico and China, prompting retaliation. Investors are buckling up for a rollercoaster ride for the global economy, with the European Union expected to be next in line for punitive duties. The FTSE 100 has been stopped in its tracks with the record run upwards going into reverse. It fell sharply in early trade amid worries that listed multinationals could be caught in the cross-fires of the trade wars. Japan’s Nikkei traded sharply lower, as investors assessed the repercussions for big corporates. European indices are also set for a rocky day of trading and Wall Street is set to open firmly in the red.
What was considered to be bluff and bluster from Trump has turned into cold hard reality. But President Trump is no longer the only one playing hardball. Canada’s outgoing Prime Minister Trudeau immediately imposed tit-for-tat 25% tariffs on $155bn in US imports. Mexico’s President has also ordered retaliatory action. These new aggressive actions on what used to be neighbouring allies, are the modus operandi of the new Trump administration, and part of not just trade policy but national security strategy. They’ve been imposed, not simply because of goods surpluses with the US, but over claims there’s been a lack surveillance on the borders enabling fentanyl to pass through and fuel the US opioid crisis. There is a glimmer of hope that a long-running dispute could be averted with a flurry of calls expected between Trump the leaders of Canada and Mexico, with China also counting on talks. But what’s clear is that Trump is way of doing business is to sow seeds of chaos and unpredictability to gain domestic political wins.
The fast-developing situation has re-ignited inflation concerns, given that tariffs are set to push up consumer prices. Canadians have already been warned they face tough times ahead, and even Trump has warned there may be some pain for Americans. While some costs may be able to be absorbed by importers and retailers, the burden is set to be passed onto customers in the form of higher prices which risks adding to inflationary pressures. Higher-for-longer rates in the US risk weighing on consumer sentiment and their purchasing power and ultimately effect economic growth. The dollar has surged in strength against a basket of currencies, as hopes for rate cuts from the Fed are reassessed once more. It’s highly likely that policymakers will stay highly cautious until it’s become clearer where the fallout will land in the US economy. While billions of dollars raised in tariffs might help put a dent in the US deficit, there’s a risk to American growth prospects ahead. The tariffs are likely to push up costs in the supply chain for US manufacturers, including big tech.
With the dollar flexing more muscle, there’s already a risk that inflation could be imported to other countries which are highly reliant on raw materials priced in dollars. While at an interest rate cut is still widely expected from the Bank of England this week, there is likely to be trepidation voiced among policymakers about the risks ahead from a global trade war. However, it could end up denting global growth prospects, and forcing big companies to reduce prices to stay competitive, which may end up increasing the chances of further rate cuts ahead.
The latest moves won’t do much to calm the high tensions which have hit the semi-conductor sector. Companies like Nvidia rely on the production of chips from outsourced factories overseas, like China and Mexico – but many other parts needed to construct AI data centres could also be vulnerable to tariffs, given they are imported. China is a huge source of electrical imports into the United States - with everything from video consoles to phones and phones potentially affected by tariffs.
Brent Crude has gained ground as traders assess the risks to the supply of oil on world markets. Canadian crude imports into the US will be slammed with a 10% tariff pushing up the costs for US refiners, while energy imports from Mexico will face a 25% tax. However, longer term the outlook for oil is clouded in fresh uncertainty. There may be downward pressure ahead as an escalating tariff war. encompassing more and more countries globally is likely to weigh on energy demand.
At the December meeting, the BoE made a dovish pivot that signalled a willingness to support growth despite the inflation risks. It would come as a major surprise to economists and markets alike if the BoE did not vote to cut rates on Thursday.
Unlike the Fed, the BoE will be less confident in the ‘solid’ nature of the labour market. Wage growth may be sticky, and surveys show price expectations have firmed in recent months but a variety of indicators are showing employment strains, complicating the policy stance. As such, it shouldn’t come as a surprise that the MPC will be most likely be split – even three ways.
In the coming months and in the medium term, the BoE will have to monitor closely how the price signals manifest themselves in the data. High inflation risks the second-round effects being stronger; the pass-through from the National Insurance tax increases are likely to also keep the MPC cautious and only on a gradual cutting path.
The news of tariffs levied by the US against Canada, Mexico and China will inevitably raise questions on how central banks - especially the ECB but also the BoE – should respond should they also be subject to such protectionist measures. It is too late for the BoE to adjust its forecasts and assumptions for global growth, but any further weakness in the euro area economy will likely spillover to the UK. For some MPC members, the case for a pre-emptive cut may be enhanced.
“One other point of interest in the Monetary Policy Report will be the Bank’s refreshed assessment of the supply side of the economy. Typically, the BoE and OBR have had very different views on potential growth, with the Bank being far more pessimistic. Latest upward revisions to long term net immigration should be a boost to the labour supply and therefore better for growth, although productivity and impacts on inflation are uncertain.
"Trump and his US tariffs: market reaction" was originally created and published by Private Banker International, a GlobalData owned brand.
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