Trump's trade war salvo jolts markets

Investors bought dollars, sold stocks and fretted about inflation on Monday in a scramble to assess the risk of trade war after Donald Trump put tariffs on top U.S. trading partners.

Trump's orders for additional levies of 25% on imports from Mexico and most goods from Canada, as well as 10% on goods from China are light on detail. But they kick in on Tuesday and have jolted markets that had assumed Trump was mostly bluff and bluster.

"Trump's trade war has started," said Alvin Tan, head of Asia currency strategy at RBC Capital Markets in Singapore, noting it was hard to see the dollar retreating any time soon.

The dollar has been the main mover, gaining as Trump headed for and then won office because investors figured tariff-hit countries would weaken their currencies to offset the impact.

On Monday, the euro fell 1.3% on fears Europe may be next on the tariff list.

Canada's dollar skidded to a 20-year low on the greenback, China's yuan slid in offshore trade, oil jumped, metals slumped and U.S. equity futures dropped about 2% on risks to U.S. companies' bottom lines.

The longer-run implications for other asset classes is less clear.

Stocks fall

Stocks fell as analysts, such as those at Barclays, expect a drag on U.S. company earnings and uncertainty on how the rest of the world responds. Canada has already ordered retaliatory tariffs and Mexico has flagged a retaliatory response.

Shares in Taiwanese tech companies with factories in Mexico fell heavily, with Foxconn down 8%, Quanta down around 10% and Inventec off 8%.

China, still closed on Monday for the Lunar New Year holidays, said it would challenge Trump's tariffs at the World Trade Organization and take unspecified countermeasures.

An employee of the foreign exchange trading company Gaitame.com watches a TV broadcast of U.S. President Donald Trump's speech during a rally on the inauguration day of his second Presidential term, next to monitors displaying the current Japanese Yen exchange rate against the U.S. dollar, at their dealing room in Tokyo, Japan January 21, 2025Reuters

Shares in Hong Kong, Tokyo, Sydney, Seoul and Taipei .TWII made losses around 2%. European stock futures slid 2.8%.

"I don't believe market participants have fully grasped the extent of the potential fallout yet, especially as responses from affected countries unfold," said Tareck Horchani, head of prime brokerage dealing at Maybank Securities in Singapore.

He said many investors had built positions in dollars and gold in recent weeks but may still have been surprised by how quickly Trump's threats turned to action this time around.

"It's possible that some investors underestimated Trump's resolve on tariffs, expecting more negotiation rather than immediate action."

Gold scaled record highs on Friday but eased a touch against the rising dollar on Monday.

Cryptocurrencies, which have lately mirrored investors appetite for taking risks, dived with bitcoin down more than 8% since Friday to $93,700. Ether was down 25% to $2,500 - wiping out gains since Trump's election.

Anxiety

The difficulty in assessing the effect of tariffs is because their duration and precise rationale remain unknown.

Some investors still believe some sort of deal is possible or that tariffs will be quickly dismantled if Trump gets what he wants.

Ice cream vendor Carmona Camacho attends a protest against arrests and deportations of migrants by U.S. government agencies in Los Angeles, California, U.S. February 2, 2025. reuters

Trump has linked the tariffs to the flow of migrants and drugs - particularly fentanyl - into the U.S. and demanded crackdowns in Canada, China and Mexico.

China and Mexico have said fentanyl is America's problem, so prospects of a breakthrough are unclear.

"These generalized tariffs that cover a much wider range of products and are targeted toward social policy have usually proven to be a mistake," said Rick Meckler, parter at Cherry Lane Investments in New Vernon, New Jersey.

"I think that's why the market has looked at this skeptically, and with anxiety, all along," he said. "A full reaction won't be reached until it's clear this is the policy, however."

Debt markets, meanwhile, seem caught between the negative inflationary implications of higher consumer prices and the potential for rate cuts due to the hit to growth - which ought to be positive for bonds.

Benchmark 10-year Treasuries rallied slightly, pushing yields about 4.5 basis points lower to 4.52%.