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Donald Trump rattled financial markets late Monday by warning he would slap 25% tariffs on Mexican and Canadian exports to the US until the flow of illicit drugs and illegal migrants into America stops. He also said he'd impose another 10% tariff on imports from China until the drug problem is resolved, in addition to the 60% he proposed during the election campaign.
Analysts said the president-elect's latest threats could presage tariffs on other countries' exports and escalate into a full-scale trade war. They also said it could fuel volatile trading and a flight to haven assets in markets. There's also the threat of stoking inflation, meaning interest rates stay higher for longer.
Here's what analysts and commentators are saying:
"Free trade agreements are not safe. Canada and Mexico are part of the USMCA which was negotiated by Trump himself. It is clear that even countries with existing agreements with the US can be subject to tariffs.
"The softer the market reaction, the greater the likelihood of more tariffs. The equity market reaction has so far been very benign, we would argue likely on the back of the transactional interpretation. That US domestic small-caps have been leading the recent market rally also helps reduce the impact. The first Trump administration showed that the more benign the market reaction, the greater the likelihood of further escalation."
"If those tariffs are at the top of his agenda, there is now an elevated risk they will be closely followed by punishing tariffs on other countries. Trump clearly wants to make his mark and show he's the boss.
"There has been a view among some investors that Trump's tariff talk was a negotiating tactic, a threat rather than a promise. That might still end up the case, but it's clear that the president-elect has no intention of backing down for now."
"European equity markets braced for a sharp drop on Tuesday as Trump's tariff threats against China, Mexico, and Canada sent shockwaves through global sentiment.
"The president-elect's scorched-earth approach has stoked fears of a trade war, with investors increasingly wary that Europe could be next in his crosshairs."
"These tariffs will not only drive up costs for companies but also fuel inflation, which could lead to further tightening of monetary policy.
"Markets hate uncertainty, and the prospect of a full-blown trade war will send investors scrambling to reassess their exposure."
"While investors are once again on edge following Trump's latest tariff threats, we think markets also recognize that the risks of higher inflation and interest rates are implicit constraints on his policy agenda, with eventual policy outcomes potentially less inflationary than some investors previously feared.
"We see further volatility ahead, but we also expect US Treasury yields to fall in the year ahead following a 65-basis-point rise over the past two months."
"The medium to long-term outlook could shift if trade tensions escalate, potentially disrupting international trade relations.
"Such developments may heighten market uncertainty, driving increased demand for safe-haven assets such as gold as investors seek protection against market risks and economic instability."
