U.S. stock-index futures opened sharply lower and oil prices jumped Sunday night and investors braced for volatility across financial markets after President Donald Trump over the weekend announced heavy tariffs on imports from Canada, Mexico and China.
Analysts said the sweeping tariffs, including levies of 25% on imports from Canada and Mexico, 10% on energy products from Canada and an additional 10% tariff on China, would rattle investors who had previously appeared to hold out hope that Trump was using the threat of steep levies as a bargaining chip or would take a slower, gradual approach.
“Trump has made an end to the self-delusion in markets, the media and in politics that his tariff threats should be taken with a grain of salt. It has taken him only three weeks since his inauguration to raise tariffs on Canada, Mexico and China,” said Philip Marey, senior U.S. strategist at Rabobank, in a Sunday note.
Dow futures were down 605 points, or 1.4%, as Asian markets opened to kick off the global trading week. S&P 500 futures dropped 1.9%, while Nasdaq-100 futures were down 2.4%.
Bitcoin, which has traded in close correlation to the S&P 500, slumped over the weekend. The largest crypto traded around $106,000 as of Friday morning but was changing hands just below $97,500 on Sunday afternoon.
U.S. stocks ended on a down note Friday after Trump made clear he intended to follow through on the tariff plans. The Dow Jones Industrial Average finished with a loss of 337.47 points, or 0.8%, while the S&P 500 shed 0.5% and the Nasdaq Composite declined 0.3%.
“While the tariff news is not a surprise, markets have held on to a vague hope Trump may not follow through. He used tariffs as a negotiating tactic with Colombia and withdrew them once they agreed to demands,” wrote analysts at U.K.-based Matrix Trade, in a Sunday note.
They noted that the Canadian dollar and Mexican peso had held up relatively well versus the dollar “until late last week when it became clearer there was no way back.” The U.S. dollar jumped versus its Canadian counterpart, leaving it on the verge of a “massive’ breakout on the monthly chart to a new eight-year high, they observed.
Canadian Prime Minister Justin Trudeau late Saturday said the country would impose retaliatory tariffs of 25% on imports from the U.S. Mexico has threatened retaliatory tariffs, while China’s Ministry of Foreign Affairs said the country’s government firmly deplored the move and would take necessary countermeasures as well as filing a lawsuit with the World Trade Organization.
The prospect of a trade war is seen weighing on stocks and other assets viewed as risky in part because it stokes fears of inflation, particularly if there is a tit-for-tat retaliatory spiral in duties, that could prevent the Federal Reserve from continuing on its rate-cut cycle.
While Trump put a lower levy on Canadian energy imports, crude still rose sharply Sunday night. West Texas Intermediate crude for March delivery, the U.S. benchmark, jumped 3.5%.
U.S. Gulf Coast refiners are heavily dependent on heavy crudes produced by Canada and Mexico. The U.S. imported 4.42 million barrels of oil per day from Canada in 2023, representing 52% of total U.S. oil imports, according to the Energy Information Administration. Mexico comes in at a distant second, representing 11% of U.S. oil imports at 910,000 barrels per day.
“Certainly, two-year inflation swaps can move higher from here if the market fears the inflationary impacts of trade wars on the economy,” said Michael Kramer of Mott Capital Management, in a note, referring to derivatives that allow traders to hedge or speculate on inflation. “The swap has been consolidating at the upper end of the trading range for some time, and a breakout would not be favorable for the Fed’s fight against inflation.”
Not everyone is convinced tariffs will lead to an inflationary surge, arguing that a trade war raises uncertainty around not just the price outlook but prospects for economic growth.
Comments