Trump tariffs have caught markets unprepared. What now?

US President Trump delivered on the 25% tariffs that he had previously threatened on February 1^st shortly after his January 20 nomination. The market failed to take these specific threats at face value even up to the Friday close last week after countless tariff threats in his first term as president weren’t delivered on and perhaps as well after he climbed down from the threat of imposing 25% tariffs against Colombia recently. But deliver he did this time, and the markets will need to adjust quickly to this new reality and the risk of counter- moves from US trading partners, some of which have already been delivered this weekend.

Let’s review the facts in this situation, how the market is reacting and will likely react on Monday through the US session and beyond and then, what to watch for beyond the initial knee-jerk reaction.

The facts:

• The tariffs versus Mexico, Canada and China were delivered as the Trump administration complained that Mexico and Canada were not doing enough to stop illegal immigration and the flow of drugs into the US, with China also blamed for its role in the flow of fentanyl into the country. The tariffs are set to go in effect after midnight on Monday as the calendar rolls to Tuesday).
• The US will impose 25% tariffs on most imports from Canada, with only 10% tariffs to be imposed on crude oil and other energy resources, the largest import category from Canada to the US.
• The US will impose 25% tariffs on all imports from Mexico.
• The US will impose an additional 10% tariffs against China on all imports, notably eliminating the USD 800 “de minimis” exception, which will have a large impact on e-commerce retailers with significant sourcing of their product offering from China, like much of low-end retailer Temu and other China-based retailers, but also Amazon.com. Tens of billions of dollars in imports from China were escaping all tariffs under this exception previously.
• The response thus far from Canada was already comprehensive as Canada said it will assess 25% tariffs on USD 105 billion of US imports, starting with tariffs on USD 20 billion of imports in alcohol, coffee, clothing, furniture and household appliances and later on USD 85 billion of imported cars and trucks, agricultural products, steel, aluminium and aerospace products.
• Mexico has responded that it will also respond with tariff and non-tariff measures, with details not yet forthcoming.
• China denounced the tariff increases, saying they violated international trade rules and that it will challenge the tariffs at the WTO, and also declared it would take “countermeasures” that are not yet specified.
• Trump also said at the weekend that he will “absolutely” also impose tariffs on EU, saying that “we’ll be doing something very substantial with the European Union. We’re going to bring the level up to where it should be.”

How the market is reacting and will react

The market reaction will be quite negative as market participants failed to take Trump’s threats seriously until he actually delivered at the weekend. And many likely believe that these tariffs could be lifted at a moment’s notice if Trump feels like his point has been made and sees trade partners responding in the desired direction. Goldman Sachs has already been out saying it sees the Mexico and Canada tariffs as likely proving short-lived.

 How much the market fallout will continue to deteriorate beyond a significant correction of perhaps several percent in stock markets, for example, depends on whether the new tariffs are quickly rescinded because an agreement is reached or whether this devolves into a tit-for-tat cycle that descends into an all-out trade war. Here is what is happening so far and what may happen as Monday unfolds:

• Currencies. Intense USD strength, JPY firm in crosses, and maybe even stronger?. Currency markets are the first to open on Sunday and the most liquid currencies have been trading for a few hours as of this writing. The US dollar has traded about 1.5% higher versus the Canadian dollar relative to the Friday close. The US dollar was also about 1.5% stronger versus the Euro. The Mexican peso was not yet trading as of this writing, but will inevitably gap lower versus the USD on the open. The JPY went from not as strong as the US dollar to outpacing the US dollar’s gains as of this writing. The Chinese renminbi will bear close watching amid signs that officialdom there is defending the USD/CNH exchange rate level of 7.375, which was twice tested in recent years. As of this writing, the USD/CNH level is 7.36, having almost touched that 7.375 level overnight – but China is on holiday until Wednesday, so some care needed in registering what it is going on there.
• Equities. Equities will likely gap considerably lower on the open. The first market to open is New Zealand, which starts trading at 2100 GMT on Sunday evening, followed by Australia’s Sydney exchange at 2315 GMT and Japan’s Tokyo Stock Exchange at 0000 GMT.
• US Treasuries. Many see it likely that US treasuries will come under pressure as most believe that tariffs are inflationary and that they are certainly bad for growth, which raises the risks for a further ballooning of already very large US deficits. But then again, US treasuries are often a safe haven in times of trouble. We have to be very careful here in the quality of the initial reaction. Regardless, this is the most important market in the world if it shows signs of severe instability – requiring an immediate response from the Fed and the Treasury if there are signs of excessive volatility or dysfunction. While the impact of tariffs is seen as inflationary by many, there isn’t universal agreement on the matter on the path of inflation in a tariff environment.
• Crypto. Cryptocurrencies took it on the chin over the weekend as the only risky asset that can be traded on weekends when all other markets are closed. Bitcoin was down more than 3% as of this writing.

What to watch beyond the knee-jerk reaction.

This article is mostly about initial thoughts on this weekend’s dramatic announcement. There will be plenty more to consider in the days and weeks ahead. Important to note right now, though, is that if these tariff moves and counter-moves from US trade partners are sustained, we are effectively in a trade war with all of the fallout for growth and prices and disruptions to supply chains and companies that this brings. The chief longer term risk is one of stagflation: weak growth with higher inflation levels. A few specific angles on this for right now:

Companies suffering a direct hit due to production in Canada and Mexico. Car producers from Ford and especially GM, which respectively produce from 15-20% and 30-40% of their vehicles in Canada and Mexico. Volkswagen has a large Audi plant in Mexico and European carmakers are set for  a rocky performance if Trump follows through with tariffs against European countries. Some apparel makers will also feel considerable impact.

Consider the impact on the biggest American brands. Already at the weekend, Canadian hockey fans were booing the singing of the US nation anthem at NHL hockey matches in Canada and social media saw widespread demands for boycotting US products, with Tesla and Amazon especially in focus. Canadian liquor stores are being asked by provincial premiers to remove all US products from liquor stores. Tesla has additional considerable risk in China and especially in Europe if Trump moves forward with tariffs against the EU. Already Musk’s brand is under siege in Denmark, for example, if we are to infer the 50% collapse in monthly Tesla Model Y sales in the country since the summer period. Tesla sold about half of its cars outside the US in 2024.