MW 10 key takeaways for investors from Trump's latest tariff threats
By Joseph Adinolfi
Trump's focus on immigration and drug smuggling may be a pretext to trigger broad-based authority to use executive orders, Deutsche Bank says
Last night, President-elect Donald Trump took to Truth Social to declare his intention to slap new tariffs on China, Canada and Mexico immediately after returning to the White House.
Trump said he would take the action unless those countries take steps to reduce the flow of undocumented migrants and illegal narcotics into the U.S.
So far, the reaction across markets has been fairly muted, with U.S. stocks appearing largely unfazed by the news. The biggest impact has been felt in the currency market, where the U.S. dollar touched multiyear highs against the Canadian dollar $(USDCAD.FOREX)$ and Mexican peso $(USDMXN.FOREX)$. Exchange-traded funds holding Mexican EWW and Canadian stocks EWC also opened lower.
Still, many investors are likely wondering what Trump's announcement might mean going forward. Deutsche Bank strategist George Saravelos has highlighted 10 important takeaways from Trump's announcement:
1. No free-trade agreement is safe. Canada and Mexico are part of the USMCA free-trade agreement, which was negotiated during the first Trump administration.
2. It's about sending a message. It's no accident that Trump's social-media posts about tariffs followed so closely behind the official announcement that Scott Bessent would be Trump's nominee for Treasury secretary. Trump is sending a message that tariffs won't take a backseat under his agenda.
3. The tariffs would cover 40% of total U.S. trade. While limited to three countries, the impact is economically large.
4. It relates to presidential authority. It seems Trump is planning to enact these tariffs via executive order. Saravelos suspects that the most likely avenue will be invoking the International Economic Emergency Powers Act.
5. It's tactical and transactional, for now. So far, there has been no mention of tariffs as a strategic tool to deal with trade imbalances or as a revenue-raiser. The pessimistic interpretation of this, which Deutsche Bank favors, is that Trump's focus on immigration and drug smuggling is a pretext to trigger broad-based authority under the IEEPA. This would suggest that this merely an opening salvo, Saravelos said.
6. Watch China legislation in Congress. Last week, a new bill was submitted to the Senate that would remove China's permanent normal trade relations status and target tariffs of between 50% and 100%. A similar bill has been floated in the House. Involving Congress could help supercharge Trump's tariff plans.
7. Beware complex supply chains. The euro has been spared Tuesday's selling pressure due to Trump leaving the eurozone out of his announcement. That doesn't mean European companies will emerge completely unscathed: As Saravelos points out, German car manufacturers have a large presence in Mexico. And the complex interplay between Chinese and Mexican suppliers could amplify the effects of the Mexican tariffs, Saravelos said.
8. Canada is the most underpriced. The Canadian dollar has seen the biggest weakening on a risk-adjusted basis since Trump's announcement Monday night. It remains the developed-market country most vulnerable to Trump's tariff threats.
9. The softer the market reaction, the greater the likelihood of more tariffs. As Trump demonstrated during his first administration, the more benign the market reaction, the more emboldened he will feel to press ahead with more, Saravelos said.
Another plausible explanation for why stocks took Trump's tariff announcement in stride on Tuesday is that many investors see these threats as an opening salvo in a process of negotiation.
10. Truth Social is Trump's preferred platform now. During his first term, investors were forced to keep a wary eye on Trump's account on X - then called Twitter. This time around, they will need to do the same with Truth Social.
U.S. stocks opened mostly higher on Tuesday, with the S&P 500 SPX up 0.3% at 6,002 in recent trading, while the Nasdaq Composite COMP gained 0.5% at 19,153, according to FactSet data.
The Dow Jones Industrial Average DJIA lagged behind, with a drop of 200 points, or 0.5%, to 44,540.
-Joseph Adinolfi
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(END) Dow Jones Newswires
November 26, 2024 10:12 ET (15:12 GMT)
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