Trump to hold off on China tariffs but reiterates plan to hit neighbours Canada and Mexico

Donald Trump and wife Melania attend a ball in the President’s honour. Picture: Getty Images

A rollercoaster ride for financial markets at the start of Donald Trump’s second term in office shows what may be in store for investors as the US President starts to implement his policies.

Inauguration day was overall positive for global financial markets but the calm didn’t last.

Although US stocks and bonds were closed for Martin Luther King Day, the US dollar dived more than 1 per cent after the Wall Street Journal said Trump planned to study trade policies and wouldn’t impose new tariffs yet.

That caused even bigger gains in the Aussie dollar, Canadian dollar and Mexican peso as well as solid gains in US stock index futures.

Trump wanted to advance trade policies “in a measured way,” a senior policy adviser told the WSJ.

The market took it as an indication that the administration was leading toward a gradual and non-universal approach to tariffs.

The Aussie dollar hit a three-week high of US62.89c after diving to a five-year low of US61.33c last week.

The ASX 200 rose as much as 1.3 per cent to a six-week high of 8453.3 points.

In the US the S&P 500 futures extended its rise to 0.6 per cent.

But a couple of worrisome headlines from Trump was all it took to disrupt the risk-on mood.

He said that he planned to enact previously threatened tariffs of 25 per cent on Mexico and Canada at the start of February, reiterating his contention that the US neighbours were allowing the flow of undocumented migrants and drugs into the country.

“We’re thinking in terms of 25 per cent on Mexico and Canada, because they’re allowing vast numbers of people (into the country),” he told reporters at the Oval Office. “I think we’ll do it February 1.”

The Aussie dollar fell as much as 1.1 per cent to US62.09c as the US dollar soared 1.4 per cent against the Canadian dollar and Mexican peso. S&P 500 futures fell 0.6 per cent and Australia’s ASX 200 reversed almost all of its intraday rise before closing up 0.7 per cent at 8402.4 points.

Gold recovered its safe-haven status, rising 0.8 per cent to an almost three-month high of $US2,729.10 per ounce.

The 10-year US Treasury yield fell as much as 9 basis points to 4.54 per cent.

For investors betting that Trump’s bark is worse than his bite, his latest threat to quickly enact the full 25 per cent tariffs on Canada and Mexico could make them question their assumptions he won’t go ahead with the 60 per cent tariff on China that he has threatened.

“President Trump’s policy agenda – if enacted in its entirety – would have significant macroeconomic repercussions,” UBS Global Wealth Management chief investment officer Mark Haefele said.

“However, financial and political constraints are likely to mean that enacted policy risks fall short of campaign pledges in some instances. The President may ‘escalate to de-escalate’, with some of his proposals likely to prove to be negotiating tactics.”

Trump declared a national emergency at the US southern border and said expelling illegal immigrants would begin immediately.

But funding is currently unavailable for such a program, and reducing the labour supply through deportation could contribute to higher inflation.

He has also pledged to increase oil production and fill the Strategic Petroleum Reserve.

However, the level of oil production is largely controlled by private companies, and there is currently no clear sign of changes in capital spending or drilling activity because of the election.

trump has more leeway in the use of executive authority to impose tariffs on imports.

But while the use of a memorandum proposing scrutiny of current practices rather than the immediate imposition of fresh tariffs reassured markets on Tuesday, it would be premature to assume that eventual new taxes on imports will be limited in size or scope.

“In our base case, we expect the effective tariff rate on China to rise to 25 to 30 per cent from 10 per cent,” Mr Haefele said.

“We also expect measures to protect technological interests, rules limiting transhipment, and tariffs on EU autos and pharmaceuticals.”

In his view such an outcome would be unlikely to derail US economic growth or stop the US Federal Reserve from cutting interest rates by a further 50 basis points this year.

At this stage some combination of universal tariffs on all US imports, tariffs in the order of 60 per cent on China, and meaningful and sustained tariffs on Mexico and Canada were still possible.

On Tuesday, Trump indicated he was still considering a universal tariff on all foreign imports to the US, but said he was “not ready for that yet”.

“You’d put a universal tariff on anybody doing business in the United States, because they’re coming in and they’re stealing our wealth,” he said, adding that implementation could be “rapid”.

Tariff risks, US fiscal policy concerns, and shifting expectations around inflation and Fed policy were likely to keep equity markets volatile in the near term, Mr Haefele said.

“But we believe it is most likely that a combination of resilient US economic activity, solid earnings growth, lower borrowing costs, and the potential for greater capital markets activity will lead stocks higher over the balance of 2025. In our base case, we see the S&P 500 reaching 6600 by December,” he said.

Mr Haefele likes US government and investment grade bonds after the recent sell-off caused by a repricing of Fed rate-cutting expectations and fiscal concerns.

“Yields have come off their peak in recent days, but we believe they still offer an attractive entry point to lock in yields,” he said. In his base case the 10-year Treasury yield falls to 4 per cent in 2025.

In currencies, robust US economic data and ongoing uncertainty around the extent and nature of tariffs appear likely to keep the US dollar strong in the near term.

But elevated investor positioning and the current high valuation of the US dollar leaves UBS GWM expecting the US dollar to retreat over the course of 2025.