Understanding the Market Impact of Trump's New Tariff Policies

As has now been widely discussed, Trump sent out a message of intent to those nations stepping up to the negotiation table, rolling out his first executive order in quick fashion.

The incoming orders to place 25% tariffs on all Canadian and Mexican goods, and an additional 10% on all Chinese goods, showcase Trump 2.0 as a vastly entity than 2016 – He is far more prepared, has a clear game plan, and has the legal passage to execute without constraint with much of his cabinet largely now in place.

Markets now expect bold action ongoing, with the noise in markets officially increasing even before inauguration. And, while the tariffs on China are still well under the levels he campaigned on, the actions on the day suggest a probability they will be incrementally taken there over time, as his rationale for tariffs was not about trade deficits, but narcotics and this suggests tariff increases can be put forward for a multitude of reasons.

Looking at the reaction around markets, one consideration is that there has been no impact in US inflation expectations – US 2yr breakeven inflation rates are unchanged, while the more forward-looking US 5Y5Y inflation swap is 3bp lower. This may evolve, and we know that the Fed will be watching market measures of expected inflation very closely, so the lack of change on the day is a small positive for risk. There have been pockets of selling across the US Treasury curve, with yields in the 5-7yr maturities 2bp higher – although, whether that is tariff-related is debatable. One could argue that US Treasuries have been held back from rising further by a solid 5yr Treasury auction, as well as the uninspiring US economic data flow seen from new home sales (-17.3% m/m), Philadelphia Fed services (-5.9) and an inline US consumer confidence print (111.7).

The USD was the clearest expression of trade tariffs

The FX channels have been where we see tariffs risk expressed most prominently, with USDMXN hitting a new YTD high of 20.8313 before the sellers kicked in. USDMXN 1-month implied volatility (vol) has risen by 1.4 vols but at 14.8%, this level of implied vol is hardly at levels that suggest volatility traders see a significant increase in movement. USDCAD pushed to 1.4178 but has been faded through EU and US trade, with the intraday tape showing a steady grind lower. USDCNH made an attempt to break out of the consolidation range highs of 7.2672, but the rally lacked sustained buying interest and the failure to breakout has held the broad USD back from really finding upside traction – eyes in the session ahead fall on the PBoCs CNY fix (at 12:15 AEDT), to see how the PBoC react and the signal they offer to traders.

AUDUSD has been well traded as a China proxy, and it’s been a whippy ride intraday, with the spot rate initially trading lower into .6434 on the news, but subsequently reversing back to 0.6507 in early US trade. Similar to the intraday tape of EURUSD, there’s been a gradual wave of USD buyers through US trade, with both AUDUSD and EURUSD grinding lower through the US session.

Event risk for the session ahead

Discounting tariffs aside, traders will need to keep a vigil and potentially react to the deluge of data and central bank risk in the session ahead. Aussie Oct CPI get the data risk going (at 11:30 AEDT), with expectations we see headline push to 2.3% y/y, where the outcome could impact the AUD, certainly against the FX cross rates. Today’s RBNZ meeting (12:00 AEDT) should result in a 50bp rate cut, although there is a small chance they go 75bp. In the US, we see durable goods, weekly jobless claims, personal income/spending, and core PCE inflation.

In equity land, traders ease into the holiday spirit, with the S&P500 tracking a tight 26-point high-low range on the day - half the YTD average. That said, US large-cap equity has seen gains with the S&P500 +0.6% with the index closing at session highs showing the control held by the bulls. We see a notably outperformance in the S&P500 and NAS100 relative to other global DM equity bourses, where notably the EUStoxx50 / S&P500 ratio eyes a new all-time low – a trade many in the tactical space are setting in. US Small caps have lost ground, with the Russell 2k -0.7%, with funds rotating into large-cap defensives, where notably utility, comm services and staples are working.

The ASX200 to lead Asia higher

Given the leads, and the moves in the respective Aus/Asia equity index futures our opening calls for Asia cash equity trade again look for a mixed reaction on open. The ASX200 should outperform, with the index pushing back above 8400, although the upside will be held back by materials and energy plays.

The HK50 looks set for a calm open, but looking at the technical set-up on the daily chart, it’s clear that the bulls need to step up and turn this ship around as the trend lower is building and looks technically one of the weaker equity indices around.

In commodity markets, we see copper -0.7%, with crude -0.5% and gold +0.3%, with no significant reaction to confirmation that the Israeli Security Cabinet had approved a ceasefire – suggesting the outcome was largely discounted.

Good luck to all.