While we can hope that World War III is not on the horizon, the world is far from calm. Tensions between countries are escalating, and the United States’ protectionist policies are a major driving force behind this.
This week, the U.S. officially imposed a 25% tariff on all imports from Mexico and a 25% tariff on most goods from Canada. Although some energy resources are exempted, the overall impact will still be significant.
On top of that, an additional 10% tariff has been imposed on all imports from China. Beijing retaliated by filing a complaint with the WTO and introducing 10-15% tariffs on US agricultural exports as of March 10.
As tensions rise, investors have been pulling back from riskier assets. The S&P 500 fell 1.8%, while the Nasdaq dropped 2.6%. Overall, markets are almost back to the levels seen before Trump won the presidency.
European stocks are also feeling pressure, especially after Trump hinted that the European Union could face tariffs, particularly on autos and other goods, accusing the bloc of taking advantage of the United States.
So why are investors worried?
In the U.S., there is concern that these tariffs will drive up prices, forcing the Federal Reserve to keep interest rates higher for longer. This could hurt economic growth and ultimately push the economy into a recession.
To make matters worse, the Atlanta Fed's latest forecast already suggests that the U.S. economy could contract at its fastest pace since late COVID-19, with GDP expected to fall 2.8% in the first quarter of this year.
The problem is that tackling this slowdown, especially with rising inflation risks, won’t be easy. The Fed will likely need to keep interest rates higher for longer to hit its 2% inflation target.
Still, markets are beginning to believe that the central bank will not lower rates once or twice but possibly two or three times. Time will tell, but for now, the rhetoric from Fed members remains hawkish.
Elsewhere, it is estimated that a 10% tariff on European products could reduce earnings per share for EU exporters by 1% to 2%, and for giants such as Volkswagen and BMW, it could cut profits by 5% or more.
So will the U.S. market continue to fall?
Trump promised an “extraordinary” announcement today, but it is unclear what it will be. If it includes more tariffs, market sentiment could fall further. On the other hand, gold could rise due to global unrest.
