Global Markets Brace for Turbulence

By Suzanne McGee and Isla Binnie

NEW YORK (Reuters) – Global markets prepared for a rocky day on Monday after U.S. President Donald Trump initiated a trade war by imposing sweeping tariffs on Canada, Mexico, and China. This escalation threatens to disrupt economic growth and could reignite inflation.

U.S. stock futures declined sharply in early Asian trading, with Nasdaq futures dropping by 2.35% and S&P 500 futures decreasing by 1.8%.

In response, Canadian Prime Minister Justin Trudeau announced plans for retaliatory tariffs on U.S. imports, with the first tariffs set to take effect on Tuesday. Mexico’s president, Claudia Sheinbaum, indicated via social media that details of her country’s response would be revealed on Monday.

Both Canada and Mexico are among the largest trading partners of the United States, while China also announced it would implement “countermeasures”. Trump warned that Americans might experience “some pain” as a result of these tariffs.

As Asian trading commenced, U.S. oil prices surged by over $2, and gasoline futures rose more than 3%.

Market uncertainty regarding the duration and impact of these tariffs adds to the turmoil, particularly following a recent decline in tech stocks spurred by the emergence of China’s DeepSeek AI model.

The White House has yet to clarify the specifics of the tariffs, raising questions about their long-term effects. Analysts speculate whether last-minute negotiations may postpone or prevent the tariffs altogether.

The “pain” hinted by Trump may manifest as decreased U.S. corporate profits and increased inflation, which could disrupt expectations for interest rate cuts in the U.S. and further weaken currencies like the Canadian dollar and China’s yuan.

Mark Malek, chief investment officer at Siebert Financial in New York, suggested, “Until now the market has really been on Trump’s side, but that could change and the market could challenge him for the first time.”

In three executive orders, Trump imposed 25% tariffs on Mexican and most Canadian imports and a 10% tariff on Chinese goods starting Tuesday. Canada is expected to respond with 25% tariffs against $155 billion worth of U.S. goods—$30 billion on Tuesday and the remaining $125 billion three weeks later.

Analysts noted that this situation is detrimental to the Canadian (CAD), Mexican (MXN), and Chinese (CNH) currencies. The offshore yuan fell to a record low of 7.3765, and the U.S. dollar rose to a more than 20-year high against the Canadian dollar, strengthening over 2% against the Mexican peso.

JPMorgan estimates that Mexico’s peso could suffer a nearly 12% decrease if 25% tariffs are applied. The euro also dropped over 1%, reaching a two-year low.

With impending tariffs, analysts anticipate a sell-off in stocks and other high-risk assets. The S&P 500 is near all-time highs, leading strategists to predict a 3% to 5% market swing in either direction if tariffs remain.

TARIFF PAIN

Barclays strategists previously estimated that the tariffs could yield a 2.8% decline in S&P 500 earnings, factoring in potential retaliatory measures from affected countries.

Trump’s executive order allows for the escalation of tariffs if retaliation occurs from other countries.

Goldman Sachs economists predict that comprehensive tariffs on Canada and Mexico could lead to a 0.7% rise in core inflation and a 0.4% reduction in gross domestic product. They expect to update these estimates but consider the measures unlikely to be permanent.

Concerns regarding rising consumer prices are particularly critical for investors due to fears of renewed inflation, which could prompt the Federal Reserve to halt interest rate cuts.

The Federal Reserve paused its rate-cutting cycle last week, with Chair Jerome Powell stating officials are “waiting to see what policies are enacted” by the new president.

European Central Bank policymaker Klaas Knot expressed expectations that new tariffs will likely lead to increased inflation and interest rates in the U.S., potentially weakening the euro.

Capital Economics Chief North America economist Paul Ashworth warned that if tariffs drive inflation up, the Federal Reserve would be less likely to resume interest rate cuts within the next 12 to 18 months.