President Trump’s decision to impose sweeping tariffs on some of America’s largest trading partners sent shock waves through markets across the globe on Monday.
The dollar strengthened, oil prices rose and major stock indexes in the United States fell at the start of trading on Monday, with the S&P 500 down 1.6 percent, and the technology-heavy Nasdaq down 2 percent. Markets in Asia and Europe also tumbled.
When Mr. Trump was elected, many analysts and investors had brushed off his more aggressive tariff talk as bluster intended to prompt negotiation from his global counterparts. But over the weekend, the new administration followed through on the president’s promise to impose tariffs of 25 percent on imports from Canada and Mexico, the United States’ closest trading partners. Canadian energy products and goods from China will be levied at 10 percent. The tariffs are set to go into effect on Tuesday.
The drop in the S&P 500 “seems broadly justified as tariff fears rise,” said Yung-Yu Ma, the chief investment strategist for BMO Wealth Management. “The uncertainty at this stage is tremendous — not only of how these eventual negotiations will play out, but worries about how this is only the tip of the iceberg and more tariffs are on the horizon.”
Shortly after Mr. Trump’s announcement this weekend, leaders in Canada and Mexico said they would respond by placing retaliatory tariffs on U.S. goods. The peso and Canadian dollar both declined as the U.S. dollar strengthened.
Asian and European stock markets also slid on Monday. Japan’s Nikkei 225 index and South Korea’s Kospi each fell more than 2.5 percent. Markets in mainland China were closed on Monday for the Lunar New Year holiday. The Euro Stoxx 50, made up of Europe’s largest companies, dropped 2 percent.
Auto manufacturers, which have poured billions into supply chains in Canada and Mexico that could be hit by new taxes, were hit hard. Japan’s Toyota Motor and Nissan Motor fell about 5 percent in trading on Monday, while Honda Motor slumped nearly 7 percent. Shares in Stellantis, Volkswagen and the truck maker Daimler fell more than 6 percent and BMW about 4 percent.
The semiconductor giant Taiwan Semiconductor Manufacturing Company fell more than 5 percent in trading on Monday. Mr. Trump had said on Saturday that he expected tariffs would be placed on chips as well as oil and gas later this month. Shares of the British drinks maker Diageo, which has a substantial business importing Mexican tequila and Canadian whiskey, dropped more than 3 percent.
The prospect of retaliation setting off a full-scale tariff war has heightened fears among investors and economists that the inflationary pressure that dogged the U.S. economy in the aftermath of the pandemic could swiftly return.
The Federal Reserve held interest rates steady at its meeting last week, with indications emerging that the central bank is wary of the inflationary impact stemming from some of the White House’s policies. On Monday, investor expectations of when the Fed will next cut interest rates moved firmly into the second half of the year.
“The near-term consensus view is that tariffs will be inflationary,” said John Brady, an interest rate strategist at RJ O’Brien.
Prices for U.S. crude oil rose about 2.5 percent, flowing through other energy prices.
Cryptocurrency markets slumped in a broad-based move away from so-called risky assets. Bitcoin dropped 4 percent, while shares of the crypto trading platform Coinbase fell more than 3 percent.
So far, Mr. Trump has not imposed direct tariffs on Europe, but he said over the weekend that it would “definitely happen.”
The initial reaction from China, which as a big exporter could be damaged more than the United States in a global trade war, was cautious: The Ministry of Commerce said it would challenge the tariffs at the World Trade Organization.
“Rising trade policy uncertainty will heighten financial market volatility and strain the private sector, despite the administration’s pro-business rhetoric,” said Gregory Daco, chief economist for the consulting firm EY-Parthenon.
For traders, the tariffs come as a “severe shock,” Jim Reid, a strategist at Deutsche Bank, wrote in a note, after the market had “refused” to take the threat of tariffs “seriously.”
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