Financial markets experienced an early jolt under President Donald Trump’s second term, as initial relief over the lack of sweeping tariffs on all trade partners quickly gave way to anxiety. Trump’s pledge to impose tariffs of up to 25% on Mexican and Canadian imports by February 1 stirred fresh volatility across global markets, with the dollar surging and stock futures swinging between gains and losses. Meanwhile, Chinese stocks saw a rally in the absence of new tariff announcements aimed at Beijing, but analysts urged caution in interpreting the first day of Trump’s presidency.
Tariff Announcements Spark Market Jitters
The dollar initially opened lower, but quickly gained momentum after Trump’s comments about imposing tariffs on goods from Mexico and Canada, targeting trade imbalances and immigration issues. These remarks came despite earlier expectations that his administration might delay any immediate tariff action. U.S. stock futures fluctuated as traders assessed the potential impact of the limited tariff pledges, with inflation concerns rising.
The Canadian dollar and Mexican peso both tumbled by as much as 1.4%, reflecting market unease, while Bloomberg’s dollar gauge climbed 0.5%. U.S. Treasury yields fell, with the 10-year yield dropping 9 basis points to 4.54%, as traders recalibrated their expectations for inflation and monetary policy.
“We’re thinking in terms of 25% on Mexico and Canada, because they’re allowing vast numbers of people into the country,” Trump told reporters, confirming that the tariffs would begin on February 1.
The yen, however, was the only major currency to strengthen against the dollar as traders positioned themselves for a potential Bank of Japan interest rate hike, expected at Friday’s policy meeting.
Sector Impact: Car Makers and Renewables Suffer
European stocks showed little movement overall, but certain sectors were hit harder. Automakers, particularly vulnerable to tariffs due to their significant trade with the U.S., saw their shares dip nearly 1%. The impact on car manufacturers with operations in Canada and Mexico, such as those exporting from Mexico, raised concerns about potential cost hikes and supply chain disruptions.
Wind energy companies, including Vestas Wind Systems and Orsted, plunged after Trump ordered a freeze on offshore wind-power developments in the U.S., with Orsted revealing a $1.7 billion impairment due to canceled projects.
“This is clearly not the worst-case scenario in terms of trade,” said Christopher Dembik, senior investment adviser at Pictet Asset Management. “Trump’s focus is on Canada and Mexico but not on Europe at the moment. The market knows, however, that sooner or later Trump is coming for it.”
Volatility Likely to Persist
The lack of a coherent narrative on trade restrictions has heightened concerns about ongoing volatility across global financial markets. In the U.S., stock futures had initially rallied when it appeared Trump was holding off on immediate executive orders, but the mood quickly shifted as tariff threats resurfaced.
“Looking ahead, we may still expect tariffs to be implemented with some ‘fire and fury,’ but the current dynamics may favor a more reactionary approach over a predictive one,” said Jun Rong Yeap, a market strategist at IG Asia.
Global Reactions: Markets Digest Trump’s Agenda
Despite the tariff turmoil, the broader market response has been mixed. Analysts noted that the uncertainty around Trump’s trade policies could lead to periods of significant market fluctuations. The Canadian dollar and Mexican peso remain sensitive to potential tariff impacts, while European markets, though steady, may face additional volatility should Trump’s attention shift towards them.
“The tariff respite was short-lived, as expected, with the latest headline signaling that tariffs have been delayed but not averted,” said Charu Chanana, chief investment strategist at Saxo Markets. “However, it seems like Canada and Mexico are in focus, but negotiation hopes are kept alive for China, suggesting China markets may still be supported.”
Meanwhile, the fourth-quarter earnings season continued in the U.S., with companies like 3M, Netflix, and United Airlines set to report. Traders are also looking to comments from the World Economic Forum in Davos for insights into global economic sentiment.
Analyst Commentary on the Trade Landscape
Several analysts offered their perspectives on the evolving situation:
- Jan Hatzius, chief economist at Goldman Sachs, noted that Trump’s tariff comments were less hawkish than expected, signaling that a universal tariff could be a lower priority than previously feared.
- Jim Reid, head of credit strategy at Deutsche Bank, pointed out that the market’s more positive outlook on trade risks reversed quickly after Trump’s comments about imposing tariffs on Canada and Mexico.
- Mohit Kumar, chief economist at Jefferies, anticipated a positive impact on risky assets due to deregulation and less severe tariffs, although he acknowledged that volatility would remain elevated.
Commodities and Crypto: Mixed Reactions
In commodities, oil prices saw a dip as traders processed Trump’s domestic production-focused pledges, while iron ore rallied. Bitcoin, however, dropped for a fourth consecutive day, falling below the $102,000 mark.
With the uncertainty surrounding Trump’s trade policies continuing to roil markets, investors are bracing for more volatility in the coming weeks, as they track tariff developments and await further signals on the administration’s approach to global trade.
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