Fast reading
- US President Donald Trump unleashed then rescinded punitive tariffs on Mexico and Canada.
- China trade still in focus with a suggested 10% tariff on all US-bound trade; Europe also in the firing line.
- Despite the frenzied headlines, markets remained largely unfazed.
Stand-offs, climb downs and bazooka retaliations were among the watchwords this week after US President Donald Trump unleashed punitive tariffs against some of the country’s biggest trade partners.
Among the announced measures were levy tariffs of up to 25% on goods and services out of Canada and Mexico, although these were subsequently suspended when those two countries threatened to retaliate in kind.
China trade was also in the crosshairs, with a suggested tariff of 10% on all goods exported to the US. Beijing responded by saying it would implement a 15% tariff on US coal and liquefied natural gas (LNG) products as well as a 10% tariff on crude oil, agricultural machinery and large-engine cars from 10 February.
The European Union got into the game as well – with trade ministers meeting on Tuesday (4 February) in Warsaw to discuss the prospect of retaliatory ‘bazooka’ tariffs on US Big Tech.1
Despite the fast-paced turn of events, markets largely took the week’s trade tribulations in their stride. The VIX Index2, a reliable marker of volatility in equities, actually fell from its 18.62 Monday open to 16.11 by midday Thursday. The S&P 500 opened the week to a sharp but short-lived decline but had recovered most of the lost ground by the opening bell on Thursday.
In our view, valuations are extremely cheap, and that Chinese equity markets are more than discounting the trade risk
One dissonant note came from the commodities space, where gold – traditionally a hedge against inflation – hit an all-time high. The yellow metal reached US$2,882.22/oz on 5 February, representing a 27% increase year to date.3
Damian McIntyre, Head of Multi-Asset Solutions at Federated Hermes agrees that a ramp-up in tariffs could increase inflation in the short run, especially if companies pass on costs to consumers. “However, we’d view these price rises as a one-time inflation impact, rather than a sustained increase,” he notes. “These trade disputes have the potential to keep rates higher for longer in the near term, but we don’t expect them to have long-term implications for central bank policy.”
More broadly, says McIntyre, many companies have already re-engineered their supply chains and this week’s tariffs talks will only reinforce that trend. “We believe companies will look to create and maintain robust global supply chains, while focusing on a multi-polar regional framework,” he says. “Donald Trump has notified the world that tariffs are a tool he’s willing and able to use. While this could prove to be a negotiation tactic, it has the potential to reshape global investing narratives, including the need for higher risk premiums by countries that he deems as not playing fair.”
Chris McGinley, Head of Trade Finance, Federated Hermes, notes that, despite this week’s headlines, the impact of any trade war could remain localised, impacting only those countries directly involved. “We believe South-to-South trade should remain largely unaffected,” he says. “This is an area that’s more important than ever and – regardless of what happens in Washington, Brussels or Beijing – it still needs financing. If anything, we believe higher commodity prices and a stronger US dollar could help EM-to-EM trade in the long run.”
James Cook, Investment Director, Emerging Markets, Federated Hermes, notes that the 10% levy imposed on China exports was below the 25% imposed on Mexico and Canada. This discrepancy could signal a degree of caution in Trump’s approach to China, he argues.
“Perhaps the lower levy is just an initial bargaining chip for more pressing needs, such as Beijing’s support on Russia and Iran, halting the illegal trade of Fentanyl, or the persuasive pull of his highest profile supporters who have significant manufacturing interests in China,” says Cook. “While there’s considerable noise and uncertainty, we don’t see escalating trade tensions as a game changer in the prospects for the Chinese market. We stick to what we do know which is that, in our view, valuations are extremely cheap, and that Chinese equity markets are more than discounting the trade risk.”
At the same time, China has bigger fish to fry, according to Cook: “The country’s main problem is not Trump but the domestic economy,” he concludes.
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1 Financial Times: ‘EU prepares to hit Big Tech in retaliation for Donald Trump’s tariffs’, 5 February 2025.
2 The VIX Index is a calculation designed to produce a measure of constant, 30-day expected volatility of the US stock market, derived from real-time, mid-quote prices of S&P 500® Index call and put options.
3 Source: Bloomberg as at 6 February 2025. Past performance is not a reliable indicator of future returns.
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