The threat of tariffs by the US against Mexico, Canada, and China is adding uncertainty to financial markets

At the end of Tuesday, the Dow Jones Index (US30) was up 1.24%. The S&P 500 Index (US500) added 0.88%. The Nasdaq Technology Index (US100) increased by 0.58%. Yesterday, on his first day in office, Trump took a number of steps to advance his agenda, but refrained from immediately imposing tariffs as many expected. However, he later revealed plans to impose a 25% levy on Mexico and Canada, while avoiding mentioning China. First and foremost, the move would put pressure on the peso by depriving Mexican manufacturing, especially the auto sector, of a major source of demand, which could force the Bank of Mexico to accelerate rate cuts. Second, these tariffs will significantly reduce demand for Canada’s largest exports, which will reduce dollar inflows. Further pressure comes from Trump’s emphasis on increasing domestic energy production in the US, which could reduce Canadian energy exports, forcing producers to lower selling prices.

Canada’s annualized inflation rate for December 2024 fell to 1.8% from 1.9% in the previous month, slightly below market expectations, which had expected it to remain at 1.9%, and marked the lowest rate of price increases since September. As a result, inflation remained at or below the Bank of Canada’s (BoC) 2% average target for the fifth consecutive month, reinforcing expectations for further rate cuts this year.

Equity markets in Europe were mostly up on Tuesday. Germany’s DAX (DE40) rose by 0.25%, France’s CAC 40 (FR40) closed up 0.48%, Spain’s IBEX 35 (ES35) fell by 0.14%, and the UK’s FTSE 100 (UK100) closed positive 0.33%. The ZEW Economic Sentiment Indicator for Germany fell to 10.3 in January 2025 from 15.7 in December and well below the projection of 15.3 as the German economy contracted for the second consecutive year in 2024 and inflationary pressures are rising. If these trends continue this year, Germany will fall further and further behind other eurozone countries. In addition, political uncertainty is increasing due to the potentially difficult coalition-building process in Germany and the unpredictability of economic policies implemented by the new Trump administration.

Silver (XAG/USD) rose to $31 an ounce on Wednesday, hitting its highest level in six weeks, as US President Donald Trump’s tariff threats fueled demand for safe-haven assets. Silver is also supported by expectations of further interest rate cuts by the Federal Reserve this year, which could weaken the dollar and boost demand for commodities.

Asian markets were predominantly rising yesterday. Japan’s Nikkei 225 (JP225) added 0.32%, China’s FTSE China A50 (CHA50) was down 0.10%, Hong Kong’s Hang Seng (HK50) was up 0.91% and Australia’s ASX 200 (AU200) was positive 0.66%. Chinese stocks opened lower on Wednesday after US President Donald Trump said his team is discussing imposing 10% tariffs on goods imported from China, which could take effect as early as February 1. Trump’s comments overshadowed more positive developments Friday, when he held a friendly phone conversation with Chinese President Xi Jinping. At the World Economic Forum, Chinese Vice Premier Ding Xuexiang emphasized that there are no winners in the trade war and called for greater international economic cooperation.

Hong Kong’s annualized inflation rate stood at 1.4% in December 2024, unchanged for the third consecutive month and the lowest since May. On a month-on-month basis, consumer prices rose by 0.1% in December after stalling in the previous month.

Malaysia’s annualized inflation rate for December 2024 was 1.7%, slightly below market consensus and November’s 1.8%. Core consumer prices, excluding volatile fresh food and administrative costs, were 1.6% y/y in December, the lowest since January 2022.

The New Zealand dollar fell to $0.565 on Wednesday as investors priced in the country’s latest inflation data. New Zealand’s annualized inflation rate for the fourth quarter of 2024 remained at 2%, slightly higher than expected but still within the Reserve Bank of New Zealand’s (RBNZ) target range of 1-3%. On a quarterly basis, the Consumer Price Index rose by 0.5%, down slightly from a 0.6% increase in the previous period. The data suggests that price pressures remain largely subdued, reinforcing expectations of a 50bp rate cut at the Central Bank’s February meeting.