Trump Tariffs Trigger Sharp Selloff

US equity indices fell on Monday, 3 March, after President Donald Trump confirmed that previously postponed 25% tariffs on imports from Canada and Mexico will commence on 4 March. 

The S&P 500 (ES) fell 1.8%, the Dow Jones (YM) dropped 1.5%, and the tech-heavy Nasdaq (NQ) plunged 2.7% as the Trump administration announced plans for reciprocal tariffs on agricultural products.

Meanwhile, the ISM manufacturing Purchasing Managers Index (PMI) showed on Monday that growth has already been obstructed by tariff threats due to pressures on prices, with the Atlanta Gross Domestic Product (GDP) Nowcast expecting Q1 real growth at -2.8%. (Source: Barron's)

With tariffs on Canada and Mexico and an additional 10% levy on goods from China all coming into effect on Tuesday, Wall Street’s hopes of a trade deal dwindled.

Tariff Rollout Met with Immediate Fallout

US stocks witnessed significant losses on Monday after Trump said there was “no [more] room left” for further negotiations to lower the 25% import levy from Canada and Mexico. AI darling Nvidia (NVDA) plunged around 9%, EV maker Tesla (TSLA) lost 3%, and Magnificent Seven constituents Apple (AAPL), Microsoft (MSFT), Meta (META) and Alphabet (GOOG) also closed the session in the red.

The long-promised tariffs came into effect today, Tuesday, after the one-month deadline agreed upon by Trump and his trading partners, Canada and Mexico, to resolve the issues of border security and drug trafficking expired. Trump said on 27 February that despite prior agreements with the two neighbouring partners, drugs continued to flow to the US. However, Commerce Secretary Howard Lutnick complimented the two countries for recent broader security efforts. The US President also signed an executive order to double the 10% levy he imposed in early February on Chinese goods to 20%, accusing the country of its failure to clamp down on fentanyl trafficking.

Trade Partners Strike Back with Retaliation

Following Trump’s move, China announced on Tuesday reciprocal tariffs of 10%-15% on US agricultural goods from 10 March, increasing fears of a full-blown trade war. China’s Finance Ministry announced 15% tariffs on wheat, corn, cotton and chicken, alongside a 10% levy on soybeans, pork, beef, sorghum, fruits, vegetables, and aquatic and vegetable products. China also added 15 US companies to its export control list and another 10 to its unreliable list, calling the US tariffs “unreasonable [and] self-serving,” and filed for another lawsuit with the World Trade Organisation (WTO).

Canada’s Prime Minister, Justin Trudeau, has previously mentioned 25% tariffs on US beer, bourbon, beer, orange juice, and home appliances worth around $20.7 billion and threatened tariffs on an additional $86.2 billion worth of US goods if tariffs remain in effect for more than three weeks. Canada also said that reciprocal tariffs will continue until the US withdraws its tariffs, with Trudeau arguing that fentanyl seizures have dropped to nearly zero due to increased border controls.

Mexico reacted with pledges so far, saying it will also retaliate against tariffs, with President Claudia Sheinbaum saying that “Mexico has to be respected.”

Tariffs Raise Economic Concerns

Tariffs on Canada, Mexico and China could pressure prices for several goods and, in turn, hurt consumers. The Yale Budget Lab estimated in February an increase in household spending of around $2000 per year.

In 2023, the US imported roughly $38.5 billion worth of agricultural goods from Mexico, with 10% being fruits and vegetables. If the tariffs remain in place, price increases on food, in particular, could rise in a matter of weeks. In energy products, US crude oil imports from Canada and Mexico account for around 70%, according to the EIA, a key input for gasoline (RB) supply to the US.

Meanwhile, US automakers rebuked the tariffs on Canadian and Mexican imports, worrying about the costs of manufacturing vehicles and their impact on jobs. The ISM Manufacturing PMI failed to meet economist forecasts on Monday as it signalled inflationary pressures that are expected to increase further due to tariffs while confirming poor employment figures. Interest rate cut expectations by the Federal Reserve have started to increase on the back of tensions and softer US indicators, with the dollar (DX) under pressure as Europe steps up its support for Ukraine. 

Trump threatened to impose tariffs on the EU last week after announcing a 25% levy on all imports of steel and aluminium, fuelling fears of a full-blown trade war with the cross-Atlantic partner. As tensions between Trump and Ukraine’s Zelenskyy intensified following a heated exchange in the Oval Office last Friday, the US decided to suspend any military aid to push Ukraine into a peace deal with Russia and access the country’s minerals. Reports even suggest that a meeting between Trump and Putin in Russia has now been expedited.  Following Trump‘s tariffs and the suspension of military aid, European stocks took a hit on Tuesday. However, the US and the Fed's focus now might shift to Friday's upcoming jobs report.

Conclusion

President Trump decided to implement his long-awaited tariffs after a postponement in February, sending shockwaves through US equity markets and triggering immediate declines in major indices.  Key trading partners Canada, Mexico and China announced retaliatory measures of some form, with concerns increasing that tariffs will pressure prices and hurt jobs. 

As the trade war intensifies and Europe still remains un-tariffed,  all eyes now turn to the upcoming jobs report, as it could shape the next phase of monetary policy while the US-Europe spat over Ukraine is expected to take its toll.

*Past performance does not reflect future results