- Trump announced tariffs starting on February 4th.
- Mexico and Canada negotiated with the US to pause tariffs.
- Data on Monday revealed an unexpected expansion in the US manufacturing sector.
Equities collapsed on Monday after Trump confirmed tariffs on Canada, Mexico, and China. However, markets rebounded before the close as Trump delayed tariffs on Canada and Mexico. Nevertheless, he implemented the tariffs on China, increasing the risk of a trade war between the two countries.
Before Trump’s inauguration in January, analysts predicted an aggressive approach to tariffs that would start immediately after he took office. However, this was not the case, and there was relief among investors. Moreover, analysts started forecasting delays to tariffs until March. Therefore, many were caught unprepared when Trump announced tariffs starting on February 4th.
US earnings revisions (Source: Citigroup, Bloomberg)
The Trump administration was ready to impose a 25% tariff on goods from Canada and Mexico. Meanwhile, Chinese goods would suffer a 10% tariff. Such an outcome would have led to trade wars, dampening risk appetite. Analysts are already predicting poor earnings for US companies due to tariffs.
Moreover, tariffs would reheat the US economy, boosting inflation and pausing Fed rate cuts. Consequently, Wall Street collapsed. However, there was relief when reports revealed that Mexico and Canada had negotiated with the US to pause tariffs.
Nevertheless, the 10% tariff on Chinese goods took effect on Tuesday. The two countries are known competitors and have had trade wars before, under Trump. Therefore, there was little chance that China would agree to the US’s terms of trade. Instead, Chinese authorities promised to impose a similar tariff on US goods starting February 10th.
During Trump’s previous term, a trade war with China caused significant market turmoil. A similar outcome this year will likely dent risk appetite and hurt equities.
Elsewhere, data on Monday revealed an unexpected expansion in the US manufacturing sector. Business activity surged, with the ISM PMI increasing to 50.9, above estimates of 49.3. The US economy remains resilient despite high interest rates. This will also pressure the Fed to maintain high rates for longer. High borrowing costs are bearish for equities as they make it difficult for businesses to expand.
The next major report will show the state of US job growth in January. Solid growth will hurt the outlook for equities as it will mean higher rates for longer. On the other hand, weakness in the labor sector might put pressure on the Fed to ease monetary policy.