Tariff hikes unnerve Wall Street as trade war seen jolting markets

NEW YORK: Global markets are set for a fresh jolt on Monday after US President Donald Trump launched a trade war with sweeping tariffs on Canada, Mexico and China that threaten to undermine economic growth and reignite inflation.

With Mexico and Canada — the US's top two trading partners — vowing immediate retaliation and China saying it would take "counter measures", the scene was set for a round of turbulence.

Markets were dealt a blow last week as the emergence of China's DeepSeek AI model hit tech stocks, and uncertainty around Trump tariffs has weighed on broader markets.

The risk of a global trade war could hurt US corporate profits and pressure inflation, potentially upending US interest rate cut expectations, and further weaken currencies such as the Canadian dollar and China's yuan.

"I do think the markets are going to react to this," said Chief Investment Officer at Siebert Financial in New York, Mark Malek. 

"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," he said.

In three executive orders, Trump imposed 25% tariffs on Mexican and most Canadian imports and 10% on goods from China, starting on Tuesday.

Canada said it would respond with 25% tariffs against $155 billion of US goods, beginning with $30 billion taking effect Tuesday and $125 billion 21 days later.

"It's negative for CAD, MXN and CNH, as well as overall risk," said Chief Market Analyst at ATFX Global in Sydney, Nick Twidale, referring to the Canadian, Mexican and Chinese currencies.

He anticipates sizeable moves in currencies when Asian markets open after hopes for a reprieve were dashed.

Canada's dollar has been in the firing line in recent days, hitting five-year lows around 1.459 per dollar last week.

Mexico's peso would suffer a near-12% fall if the US hits the country with 25% trade tariffs, JPMorgan estimated in a note published on Friday.

Analysts also expect some kind of sell-off in stocks and other higher-risk assets when markets reopen on Monday.

Chief Investment Officer at Cetera Financial Group, Gene Goldman, said the combination of high valuations, the impact of tariffs on inflation and the effects on Federal Reserve policy would contribute to declines.

With the S&P 500 near all-time highs, the index could move 3% to 5% in either direction in the short term, Evercore ISI strategists said in a note.

Tariff pain

Barclays strategists previously estimated that the tariffs could create a 2.8% drag on S&P 500 company earnings, including the projected fallout from retaliatory measures from the targeted countries.

The executive order includes a provision for Trump to increase the size and scope of the tariffs if countries affected seek to retaliate.

Goldman Sachs economists have estimated that across-the-board tariffs on Canada and Mexico would imply a 0.7% increase in core inflation and a 0.4% hit to gross domestic product.

The potential to drive up consumer prices is a particularly sensitive area for investors, who are worried about a revival in inflation causing the Federal Reserve to stop cutting rates.

The Fed last week paused its rate-cutting cycle, while Fed Chair Jerome Powell said officials were "waiting to see what policies are enacted" with the new president.

European Central Bank policymaker Klaas Knot said on Sunday he expects new tariffs will lead to higher inflation and interest rates in the US that will likely weaken the euro EUR=EBS.

Europe also faces the risk of US tariffs.

"It's only a matter of time before the EU is targeted," said Marchel Alexandrovich, an economist at Saltmarsh Economics in London.

"In the meantime, the fact that Canada is responding and putting up tariffs against US goods is a sign of things to come and demonstrates the risks to global trade."