Just as the dust around DeepSeek begins to settle, US President Donald Trump’s follow-through on tariffs is set to stir fresh market turbulence this week, says Yeap Jun Rong, market strategist at online trading provider IG.
Over the weekend, Trump announced a 25% tariff on imports from Mexico and Canada (10% on Canadian energy) and a 10% additional tariff on China. “No doubt market participants had already been forewarned about tariffs on Mexico, Canada and China, but the full implementation seems to dash any hopes for a more gradual rollout or potential delays,” says Yeap in a Feb 3 note.
According to Yeap, the pace of escalation could catch markets off-guard as well, with market participants quickly pricing for higher global growth risks into the new week.
Canada has hit back with a 25% tariff on the US, and Yeap expects similar retaliation from Mexico and China. “While concrete details are less clear at [this] current point in time, it raises the prospects of a prolonged tit-for-tat trade war. With the US vowing to counter any retaliatory measures, the stand-off echoes the 2018 trade war, where tensions are likely to worsen before any signs of resolution emerge.”
What’s next?
The implications for trade restrictions could result in reduced global trade flows and supply chain shifts — which could mean higher costs for businesses — as well as higher inflation, says Yeap.
Trump said on Feb 3 (Feb 2 US time) that he will “definitely” place new tariffs on the European Union. The uncertainty over how long trade tensions may persist — along with the possibility that additional economies could be targeted by US tariffs — may trigger “a wave of de-risking” across global equities, warns Yeap.
“Thus far, the trade dynamics and economic asymmetry could leave the US with the upper hand, with Mexico and Canada facing heightened recession risks in any prolonged trade war,” he adds.
However, history offers a cautionary note for US equities as well, says the analyst. “During the 2018 trade war, the US markets entered correction territory, though part of the downturn was also driven by the Federal Reserve’s tightening cycle.”
See also: EU targets €26 billion of US products in tariff retaliation
Eyes will be on a series of US economic data this week, such as the Purchasing Managers' Index (PMI) figures and the US non-farm payrolls. Signs of economic resilience may cushion any US equities fallout, says Yeap, with stronger data suggesting that the US economy is in a “good standing” to weather the effect of any counter-tariffs.
Nasdaq retesting support
The initial market reaction to US tariffs saw the Nasdaq heading straight to retest a key channel trendline support at around the 20,981 level.
Holding above the trendline support may be key, with any move below the Jan 27 low — a reaction to the launch of DeepSeek — at the 20,630 level likely to serve as a bearish cue, says Yeap. “[This] could pave the way for a deeper retracement towards the 19,875 level next.”
Impact on FX
With the prospects for further tit-for-tat measures to come, sentiments around risk currencies will likely be negatively impacted for longer, says Yeap. In addition to the Canadian dollar, Mexican peso and offshore Chinese yuan, Yeap thinks the Australian dollar and “other emerging market currencies” that are sensitive to global trade dynamics could also be affected.
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On the other hand, the Japanese yen may hold up on safe-haven flows and Japan not being under US crosshairs, at least for now, he adds.
Yeap thinks the US dollar’s strength should continue, as tariffs may bring upside risks for US inflation, which should delay the Fed’s easing process and keep US policymakers on a more hawkish rhetoric.
Heightened growth risks in other economies could lead to a wider policy divergence with the US, which could support flows for the US dollar, he adds. “The year-to-date high at the 109.81 level is now in focus, with the broader upward trend leaning on the upside. A move above the 109.81 level may leave the 111.30 level on watch next.”
Gold to remain attractive
Gold should remain as an attractive hedge against geopolitical tensions, with a touch of new record high last week, says Yeap. Gold prices surpassed the key US$2,800 ($3,833.42) mark for the first time on Jan 31.
“While prices are edging slightly lower this morning, potentially due to some sell-the-news and pressures from a stronger US dollar, any dip may be short-lived as any trade escalation may likely trigger renewed traction,” says Yeap.
A broad rising channel is in place, he adds, with near-term support around the US$2,721 level. “Medium-term price target remains at the key psychological US$3,000 level, where the upper channel trendline resistance may stand.
Charts: IG
