MW Stocks expected to open lower after Trump tariffs end 'self-delusion in markets'
William Watts
Bitcoin slides, gasoline prices could see quick rise
U.S. stock-index futures were expected to open lower 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, were likely to rattle investors who had 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.
Stock futures appeared headed to another "large gap down" on the daily charts following the news, said analysts at U.K.-based Matrix Trade, in a note. A gap on the daily chart occurs when an asset opens above or below its trading range from the previous session. Stocks opened sharply lower last week as investors reacted to China startup DeepSeek's artificial-intelligence advance.
Bitcoin (BTCUSD), which has traded in close correlation to the S&P 500 SPX, slumped over the weekend. The largest crypto traded around $106,000 as of Friday morning but was changing hands just below $98,000 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 DJIA finished with a loss of 337.47 points, or 0.8%, while the S&P 500 SPX shed 0.5% and the Nasdaq Composite COMP 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," the Matrix Trade analysts wrote.
They noted that the Canadian dollar $(USDCAD.FOREX)$ and Mexican peso $(USDMXN.FOREX)$ 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.
Check out: Here's how much gas could cost you if Trump's threatened tariffs go through
"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.
Read next: Jobs report and Trump's trade war hold keys to outlook for stocks
-William Watts
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February 02, 2025 17:05 ET (22:05 GMT)
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