As Donald Trump’s inauguration looms, global markets are already grappling with the fallout of his promises to impose aggressive tariffs. With less than two weeks until he assumes the presidency, Trump has pledged to raise tariffs by up to 10% on global imports, including a sharp 60% on Chinese goods, as well as a 25% surcharge on products from Canada and Mexico. Trade experts are warning that these measures could disrupt international trade, increase costs for consumers, and provoke retaliatory actions from trading partners.
The precise scale and scope of the tariffs remain unclear, but the path ahead looks fraught with economic challenges. Here’s a closer look at how key global markets are responding.
1. China Faces Severe Economic Pressures
According to Goldman Sachs, China is expected to be the primary target of Trump’s trade agenda, potentially facing the brunt of what is being called “Trade Wars 2.0.” As investors anticipate the impact of these tariffs, China’s financial markets have come under significant strain. The yuan has already weakened to its lowest point in 16 months, dipping below the symbolic 7.3 per dollar mark, a level the Chinese government had previously defended.
Barclays predicts that the yuan could fall further, reaching 7.5 per dollar by the end of 2025, and even plunging to 8.4 if Trump imposes the full 60% tariff on Chinese goods. The country’s economic slowdown has compounded these challenges, leading to lower Chinese bond yields and a growing disparity with U.S. Treasury yields.
China is expected to gradually allow the yuan to depreciate to offset the impact of tariffs on its exporters. However, any sharp drop could trigger fears of capital flight and further undermine investor confidence—already shaken by the largest weekly stock decline in two years.
Concerns extend beyond China, with investors in other major Asian exporters like Vietnam and Malaysia also wary of the potential ripple effects.
2. Euro Faces Volatility Amid Tariff Uncertainty
The euro has fallen more than 5% since the U.S. election, hitting two-year lows around $1.04. Analysts at JPMorgan and Rabobank warn that the euro could drop to parity with the dollar within the year, driven by the uncertainty surrounding tariffs and their potential to disrupt European trade.
The U.S. is the European Union’s largest trading partner, with $1.7 trillion in annual goods and services trade, and markets are increasingly concerned about how tariffs could harm this crucial relationship. With the European Central Bank expected to cut interest rates by 100 basis points to stimulate the economy, and the Federal Reserve potentially reducing rates by only 40 basis points, the dollar is seen as more attractive, further weakening the euro.
Additionally, a slowdown in China is hurting European exporters, creating a “toxic mix” that could drag the euro even lower, according to Francesco Pesole, currency strategist at ING.
3. European Auto Industry Faces Growing Uncertainty
In Europe, the auto industry has been particularly sensitive to news about potential tariffs. Auto stocks surged briefly after a report suggested that Trump’s aides were considering targeted import duties, only to fall when Trump denied the claims. This volatility underscores the fragility of an already-depressed sector that has seen its stock prices fall by a quarter since April 2024.
Barclays equity strategist Emmanuel Cau is closely monitoring the auto industry and other trade-exposed sectors, including consumer staples, luxury goods, and industrials. A basket of Europe’s most tariff-sensitive stocks has underperformed the broader market by 20%-25% in the past six months.
The weak eurozone economy is expected to prolong the underperformance of European equities, with the STOXX 600 rising just 6% in 2024 compared to a 23% surge in the S&P 500.
4. Canadian Dollar Faces Steep Declines
The Canadian dollar has been under pressure since Trump threatened a 25% tariff on Canadian goods last November unless the country took stronger actions to combat drug trafficking and immigration. The loonie has fallen sharply, and analysts from Goldman Sachs warn that there may be further downside risk if trade talks drag on. A full-scale trade war could potentially push the Canadian dollar to 1.50 against the U.S. dollar, representing an additional 5% decline from current levels.
Compounding the uncertainty, Prime Minister Justin Trudeau’s resignation adds a layer of political instability to an already fragile economic environment.
5. Mexican Peso Struggles Amid Tariff Concerns
The Mexican peso was already facing a difficult year, having fallen 16% against the dollar by the time Trump was elected. In 2024, the peso’s performance has been the weakest since the 2008 financial crisis, dropping 18.6% overall. The threat of tariffs, which would hit 80% of Mexico’s exports to the U.S., continues to weigh heavily on the currency.
In addition, a controversial judicial reform has further eroded confidence in the peso. Recent reports about potential tariff hikes sent the peso soaring 2% before quickly retracing as Trump denied the claims. The volatility suggests that the peso will remain highly sensitive to developments along the U.S.-Mexico border, which remains a key focus for Trump’s trade policies.
With the global economic landscape hanging in the balance, markets worldwide are on edge, awaiting clarity on how Trump’s proposed tariffs will reshape trade relations and financial markets. While the full impact remains uncertain, experts agree that the road ahead is fraught with challenges, and the coming months could be marked by significant volatility across international markets.
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