Trumped

Risk sentiment is on the floor this morning after Donald Trump imposed 25% tariff on most Mexican and Canadian imports and 10% tariff on Chinese imports which will take effect from tomorrow – a move, I believe, will certainly backfire and end up in tears for everyone. But it will first add volatility and chaos to the financial markets.

The first market reaction on Monday’s open is a swift move to the US dollar. The Mexican peso gap-opened at the lowest levels since March 2022 and the USDCAD jump-opened and flirted with the 1.48 level with the prospect of melting Canadian exports toward the US and shattered growth outlook which will require a strong support from the Bank of Canada (BoC) in the coming months. Note that, the latest growth numbers from Canada already looked bad, but with Trump’s tariffs, things could snowball toward worse in a short period of time. This being said, the doji candlestick formation on the USDCAD hints at hesitation on whether the pair should travel toward the 1.50 knowing that such tariffs on the country’s two biggest trading partners – that together stand for more than a quarter of the US imports – will boost inevitably US inflation, cut the dream of further Federal Reserve (Fed) cuts short, and could require rate hikes, instead, to deal with a likely price shock. The hawkish shift in Fed expectation and flight to safety explain why the US dollar is widely in demand this morning. But the tariffs will also weigh on the US growth expectations, and the latter should limit the dollar’s upside potential and weigh on equity valuations.

European markets are set to open deeply in the red, the US futures are deeply in the negative as well, provided that the tariffs will severely increase many companies’ costs and hit their profit margins.

And oh, as per Europe, Trump ramped up his tariff threats and the EU said it would retaliate. The EURUSD is also heavily sold at the weekly open, but here as well, the doji candlestick formation hints that the Trump trade can not be one-sided. The US will also suffer from such dramatic tariff increases, the monstruous tariffs will immediately weigh on the US growth outlook as well and prevent the US dollar from fully benefiting from Trump’s America First Policies. Instead, the US could end up in a less appetizing America Alone setting.

Now coming back to the fundamentals, Friday’s PCE numbers from the US came in line with market expectations, while the softer-than-expected German inflation reinforced the dovish European Central Bank (ECB) bets – that are stronger this morning with the fear that Trump would wake up one morning and impose huge tariffs on European imports as well. Overall, the upside pressure in the US dollar will likely remain until the dust settles, but the risk of retaliation, the fact that the tariffs will likely boost US inflation and hit the US growth prospects should quickly build a barrier in front of the US dollar bulls’ path toward the north. And the risk selloff will likely lead to correction in equity markets on both sides of the Atlantic Ocean. Even robust earnings will hardly improve global risk sentiment this week. Big companies including Alphabet, Amazon, AMD, Novo Nordisk and Qualcomm are due to announce their earnings this week.

Inside Oil

Exxon announced better-than-expected earnings and income in Q4 thanks to increased production in the Permian Basin and Guyana. But earnings from the energy products unit dropped significantly with weaker refining margins and reduced global fuel demand, especially from China. Exxon also reduced its share repurchases. Trump’s tariffs will likely further squeeze profit margins and keep risks tilted to the downside. The picture is worse on the Canadian side of the border, of course, as the 25% tariff on Canadian imports will make the European and Asian exports toward the US more competitive. As such, the Canadian Imperial Oil shed more than 6.5% on Friday, other Canadian oil companies were severely pressured as well, while Saudi Arabian oil is 0.18% down in Tadawul this morning.

As per crude oil, the price jumped as a kneejerk reaction to Trump tariffs, as Canadian and Mexican crude oil imports are particularly impactful, given that these countries are among the largest suppliers of crude oil to the US. But the gains remained short-lived above the 200-DMA and the price of crude is back to Friday’s closing level as the shattered prospects of global growth will likely outweigh the geopolitical risks and keep the upside potential limited. Brent on the other hand gives a different reaction to Trump’s tariff threats as Brent is less exposed to the US trade policies. While Brent is expected to follow WTI due to general market sentiment, the effect should be less pronounced because its supply chain is not directly affected by US tariffs.