Global stocks showed little movement on Monday, while the dollar strengthened after U.S. President Donald Trump warned of additional tariffs, including on steel and aluminum imports. The potential for rising inflation from these tariffs could limit the Federal Reserve’s ability to cut interest rates in the near future.
Trump’s Tariff Warning and Global Reactions
President Trump, speaking to reporters aboard Air Force One, confirmed that he would announce a 25% tariff on all steel and aluminum imports into the U.S. on Monday. He also hinted at other reciprocal tariffs, which are expected to be revealed on Tuesday or Wednesday. These announcements come amid growing concerns about a trade war, as German Chancellor Olaf Scholz warned the European Union would retaliate “within an hour” if the U.S. imposed tariffs on European goods.
Meanwhile, China is set to implement retaliatory tariffs on some U.S. exports starting Monday, with no signs of progress in trade negotiations between Beijing and Washington.
Strategic Negotiation or Trade War?
Some analysts believe the tariffs could be part of a broader negotiating strategy by Trump, while others fear it marks the beginning of a prolonged trade war. Stephen Dover, head of the Franklin Templeton Institute, noted that nearly half of U.S. imports are used as inputs by domestic companies. This means businesses may have to either pass on higher costs to consumers, absorb the costs themselves, or completely overhaul their supply chains.
Currencies from countries targeted by Trump’s tariffs are expected to weaken against the dollar, partially offsetting the impact of the taxes and helping their exports remain competitive. At the same time, the tariffs could add pressure to U.S. inflation, making it harder for the Federal Reserve to ease monetary policy.
Inflation and Rate Cuts in Focus
Markets had already reduced expectations for interest rate cuts this year, scaling them back from 42 basis points to just 36 basis points, following a positive U.S. payrolls report last Friday. Federal Reserve Chair Jerome Powell is scheduled to testify before the House of Representatives on Tuesday and Wednesday, and the impact of the tariffs on Fed policy will likely be a key topic.
Powell’s testimony will follow the release of U.S. consumer price data for January, which could show early signs of inflationary pressure. Recent surveys have already indicated a sharp rise in inflation expectations among consumers, though long-term projections remain stable.
Dollar Strengthens Amid Tariff Fears
Investors responded to the tariff news by pushing the dollar higher. The U.S. Dollar Index was firm at 108.26, with the euro slipping 0.1% to $1.0314. The Australian dollar, sensitive to global trade developments, fell to $0.6274. The dollar also rose by 0.3% against the yen, reaching 151.85.
In Asia, MSCI’s broadest index of shares outside Japan declined by 0.09%, while Japan’s Nikkei gained 0.08%. South Korea’s main index reversed early losses to rise 0.16%, although steelmakers saw losses. Chinese blue-chip stocks rose by 0.3%, alleviating some concerns about deflation after data showed inflation accelerated to its fastest pace in five months in January.
European and U.S. Markets React
In Europe, Eurostoxx 50 futures gained 0.3%, while FTSE and DAX futures rose by 0.14%. In the U.S., Wall Street futures initially started lower but soon rallied as investors focused on the busy earnings week ahead. By midday, S&P 500 futures were up 0.26%, and Nasdaq futures added 0.5%.
Despite mixed earnings reports last week, overall earnings growth for S&P 500 companies is running at 12%, well above initial expectations of 8%. However, analysts at Goldman Sachs warned that tariffs pose a significant downside risk to 2025 earnings per share (EPS) forecasts. They estimate that the effective U.S. tariff rate could increase by five percentage points, reducing EPS by 1% to 2%.
Inflation and Treasury Yields
The potential for tariffs to reignite inflation also weighed on U.S. Treasuries. Yields on 10-year U.S. Treasury notes rose to 4.4826%, up from last week’s low of 4.400%.
Despite the dollar’s strength and higher yields, gold prices hit record highs, reaching $2,886 an ounce. This surge was partly driven by speculation that Trump might impose tariffs on gold imports. As a result, there was an increase in demand for physical gold, particularly in London, as investors looked to avoid potential new taxes on the metal.
Gold prices were up 0.8% at $2,884 per ounce on Monday.
Oil Prices Struggle Amid Trade War Concerns
Oil prices saw modest gains on Monday, as markets remained concerned that a trade war could harm global economic growth and reduce energy demand. However, after three weeks of losses, the market was due for a bounce. Brent crude rose 44 cents to $75.10 per barrel, while U.S. crude gained 43 cents, reaching $71.43 per barrel.
Despite these gains, concerns over a prolonged trade war and its impact on global growth continue to weigh heavily on energy markets.
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