The dollar surged, oil jumped and equity markets turned red after US President Donald Trump made good on his threat to impose tariffs on the exports of Canada, Mexico and China.
The yields on US Treasuries gained while stock futures slumped, and an index of Asia-Pacific shares also dropped in response to the punitive measures taken against some of America’s biggest trading partners. The Canadian dollar sank to its weakest since 2003, with euro and Mexican peso also posting losses.
The rapid escalation in tensions is fueling a flight to haven assets as investors brace for the knock-on effects of Trump’s move on everything from inflation to geopolitics and economic growth. While Trump long pledged sweeping trade levies to combat issues such as illegal immigration and illicit drugs, global stocks had rallied in anticipation tariffs would be delayed or avoided as officials sought to negotiate deals.
“The market needs to structurally and significantly reprice the trade war risk premium,” George Saravelos, head of FX research at Deutsche Bank, wrote. “For Canada and Mexico, we see this trade shock – if sustained – as being far larger in economic magnitude than that of Brexit on the UK.”
Behind the rally in the dollar is the bet that tariffs will fuel inflationary pressures and keep US interest rates elevated, while also hurting foreign economies more than the US and adding to the greenback’s safe-haven lure. Foreign currencies get hurt as American demand declines for costlier imports.
Traders are on alert for big swings in stock markets in sectors that are considered the front lines of any trade war. A UBS Group AG basket of stocks at risk from the proposed tariffs sank on Friday on concerns levies would fan inflation and hit bottom lines.
Automakers such as General Motors Co. and Stellantis NV, which have global supply chains and massive exposure to Mexico and Canada, could see significant moves. Electric vehicle manufacturers Tesla Inc., and Rivian Automotive Inc. could also feel the pinch. Mentions of the word “tariffs” are already surging on earnings calls.
Corporate earnings due this week include Amazon.com Inc. and UBS Group AG.
In response to the US announcement, Canadian Prime Minister Justin Trudeau unveiled a 25% counter-tariff, while Mexican leader Claudia Sheinbaum pledged retaliatory levies. China’s Commerce Ministry issued a statement vowing “corresponding countermeasures,” without elaborating, and vowed to file a complaint to the World Trade Organization.
The tariff announcement also sparked a surge in the price of oil as levies on imports from Canada and Mexico threaten to disrupt North America’s tightly integrated oil market and push up gasoline prices for American motorists.