Trump’s tariff policy sets stage for market volatility

- Advertisement -

LONDON/SINGAPORE/NEW YORK- Investors were tentatively breathing a sigh of relief on Tuesday as US President Donald Trump’s initial policy diktats on tariffs were less stringent than they had feared, despite setting a tone of uncertainty in global markets.

Trump had vowed to immediately impose steep tariffs of 10 percent to 20 percent on global imports into the US and 60 percent on goods from China.

After assuming office on Monday, he did not immediately impose tariffs – he only issued an order that directed agencies to “investigate and remedy” the US trade deficits. Later on Monday, however, Trump told reporters that he was considering imposing 25 percent tariffs on Mexico and Canada on Feb. 1.

- Advertisement -

Taken together, it made for a volatile market. The dollar, which fell initially on news that there would be no tariffs, regained some of its lost ground against the Mexican peso and the Canadian dollar once Trump made his remarks.

By Tuesday, even that initial move was drawing down as investors thought he was subsequently milder.

“The extent of Trump’s protectionist policies remains the market’s primary focus, and so far, there are early signs that he may be less aggressive than feared,” said Matt Weller, head of market research at StoneX.

The first 24 hours of the presidency underscored what investors expect to be a new reality for markets – that the only certainty about Trump’s second US presidency looked to be uncertainty.

Chinese markets were relieved after Beijing avoided an instant blizzard of executive orders, while Mexico’s peso and Canada’s dollar posted gains on Tuesday afternoon after tumbling the day before.

“Markets are having a shattered glass type of moment,” said Callie Cox, chief market strategist at Ritholtz Wealth Management. “Lofty tariffs didn’t come on day 1, and concrete details may still be far off.”

The dollar was roughly flat on Tuesday after plunging during the inauguration, with the tariff warning pushing it to a five-year high against its Canadian counterpart, a rebound that also pushed the euro and pound down in Europe.

The S&P 500 was up 0.88 percent as traders stuck to the view the returning president’s “America First” mantra would boost corporate profits.

Trump also said he wanted to reverse the US trade deficit with the European Union.

Nigel Green, CEO of the deVere financial advisory group, said the consequences of 25 percent tariffs on Mexico and Canada “could be seismic”.

Asian investors saw China’s yuan and Hong Kong shares push higher on Tuesday. Battery and wind energy stocks dropped though after Trump confirmed he was reversing green energy policies and pulling the US out of the Paris climate accord.

An aggressive round of US tariffs – where they exceed current assumptions – could drive economies from Canada to Europe into recession.

The unpredictability of US policies, however, is not deterring all investors.

“We are active managers so for us this is a great environment, we like uncertainty and we like volatility as it gives us opportunities,” Konstantin Veit, a European portfolio manager at bond giant PIMCO, said.

PIMCO expects the negative impact of tariffs to drive down interest rates in Europe and elsewhere but could also push US Treasury yields back to a juicy and attractive 5 percent.

Global currency swings illustrate how investors are struggling to assess the impact of tariffs.

The dollar hit a five-year high of 1.452 Canadian dollars but remained steady around C$1.43 in afternoon trading. Meanwhile, the Mexican peso gave back much of Monday’s 1.5 percent gains against the dollar, last trading down 0.7 percent at 20.618.

- Advertisement -spot_img

Treasuries rallied, with the 10-year Treasury yield down to 4.574 percent, while MSCI’s 47-country world share index which has more than doubled in value since Trump’s 2016 election win and is now worth nearly $80 trillion, was up about 0.69 percent.

Cryptocurrency markets, which soared in the run-up to Trump taking office, stalled as the lack of any instant crypto-friendly announcements stirred some disappointment. Bitcoin which came close to $110,000 on Monday, was trading 4.13 percent higher at $106,759.

Author

- Advertisement -

Share post: