Global markets fell on Monday (3 February) over fears that US tariffs on Canada, Mexico and China could start a trade war.
The measures, announced by US President Donald Trump over the weekend, see a 25% tax placed on goods from Canada and Mexico, and 10% on imports from China.
In response, Canada has already announced a tariff on US goods while Mexico and China are also expected to retaliate.
At 11:45am, the FTSE 100 had fallen 1.2% since the start of the day’s trading, following similar falls overnight in Asian markets.
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Richard Flax, CIO at Moneyfarm, says investors are increasingly concerned that these moves could trigger a cycle of retaliatory tariffs, escalating into a full-scale trade war.
“With the new administration taking a more aggressive stance than some had anticipated, markets are now reassessing his previous rhetoric to anticipate the administration’s next steps,” he says.
“The president has long held the view that import tariffs could help fund the federal budget as an alternative to raising taxes. Now, emboldened in his second term, his administration appears more determined to pursue this strategy, having taken a more measured approach during his first term.
“The initial market rally following Trump’s re-election was driven by optimism over deregulation, with investors largely downplaying the risks of protectionist policies. However, the rapid implementation of tariffs – including those targeting key allies – has forced markets to consider the economic consequences.”
He added attention will now shift to Europe, following Trump’s comments that tariffs on the EU are “definitely happening”.
“For American consumers, these tariffs are expected to be inflationary, exacerbating the financial strain from the high inflation seen between 2022 and 2023. These moves also raise questions about the Federal Reserve’s ability to cut interest rates in the near term. Given the heightened uncertainty, the Fed is likely to hold rates steady, opting to assess market conditions before considering any adjustments.”
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According to AJ Bell investment director Russ Mould, markets had assumed that Trump would talk tough on tariffs before backing off when he got a deal. Therefore, his plan to act first and then talk has come as a “nasty surprise” to share prices around the world.
“Trump’s launch of tariffs in 2018 did raise revenues for America but US corporate profits took a hit that year and America’s S&P 500 index fell by a fifth, so markets have understandably taken fright this time around.
“Weirdly, stockmarkets have begun Trump’s second term in boisterous form, in marked contrast to 2016’s election result when they approached the Republican candidate’s win with caution. Ultimately, the S&P 500 gained 56% during Trump’s first term, but that came with a big wobble in 2018, when the index lost 5% overall and endured a mini bear market in the autumn, as threats of tariffs on China became reality.
“America’s tax take did benefit, as customs duties doubled in short order. The tattered state of US federal finances, where the debt is far higher now and the interest bill is surging, means this offers some good news, from an American perspective.”