World markets vulnerable to Trump tariffs - China, Europe and Canada at risk from US trade policies
From China to Europe, including Canada and Mexico, global markets are feeling the risk of Donald Trump's promise to raise tariffs when he takes office as US president in less than two weeks.
Trump has promised tariffs of up to 10% on global imports and 60% on Chinese goods, plus an additional 25% on imports on Canadian and Mexican products, duties that trade experts say would disrupt trade flows, raise costs and would cause retaliatory measures.
The scale and scope remains to be seen, but the road ahead appears fraught with obstacles.
1/ China's fragility
"China is likely to be the main target of Trump 2.0 trade wars," according to Goldman Sachs. Investors are already reacting, forcing the country's bourses and central bank to defend the yuan and falling stocks.
China's controlled currency is at its weakest level in 16 months, with the dollar trading well above the symbolic landmark of 7.3 yuan that authorities had defended. Barclays sees the yuan at 7.5 to the dollar by the end of 2025 and slipping to 8.4 in a scenario in which the US imposes 60% tariffs.
Even without tariffs, the currency has been hurt by a weak economy that is pushing up Chinese government bond yields, widening the gap with elevated U.S. Treasury yields.
Analysts expect China to allow the yuan to weaken to help exporters manage the impact of tariffs, but gradually. A sudden drop would bring to the fore dormant fears of capital outflows and shaken confidence, already damaged as stocks saw their biggest weekly drop in two years.
2/ "Toxic mixture" for the euro
The euro has fallen more than 5% since the US election, more than all major currencies, hitting a two-year low of around $1.03. JPMorgan and Rabobank think the currency could fall to $1 this year, due to tariff uncertainty.
The US is the European Union's most important trading partner, with $1.7 trillion in two-way trade in goods and services.
Markets are anticipating a 100 basis point European Central Bank rate cut this year to shore up the weak economy. But traders, speculating that the tariffs could boost US inflation, expect only a 40 basis point Fed rate cut, adding to the dollar's appeal against the euro.
A weakened Chinese economy also hurts Europe. Tariffs hitting China and the EU at the same time could be a "very toxic mix for the euro," currency strategist ING said.
3/ Vehicle problems
In Europe, auto stocks are also particularly vulnerable to tariff-related threats. The swings highlight the vulnerability of investors in an already depressed sector that has seen its shares lose a quarter of their value since their April 2024 peak.
Barclays' head of European equity strategy said cars are among the trade-exposed consumer sectors he is watching closely. Other sectors include everyday products, luxury and industrial goods.
A Barclays basket of the most tariff-exposed European stocks is down about 20%-25% against the main market in the past six months. Eurozone economic weakness could also extend the underperformance of European stocks.
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