Investors Are Tariff-ied

Hello Traders, we hope you’re having a nice weekend. Here are some of the biggest stories this week:

1. Trump announced steep tariffs on imports from Canada, Mexico, and China.
2. Eurozone inflation unexpectedly accelerated.
3. The Bank of England cut interest rates.
4. Global temperatures breached a key climate threshold for the first time.

Dig deeper into these stories in this week’s review.

Trade War

Donald Trump officially ignited the trade war all investors were dreading, announcing steep new tariffs on products from Canada, Mexico, and China – three of the US’s biggest trading partners – over the weekend. The US President issued an executive order on Sunday applying additional tariffs of 25% to all imports from Canada and Mexico, with the exception of Canadian oil and energy products, which will face a 10% levy (Canada is by far the biggest foreign oil supplier to the US, accounting for about 60% of its crude imports). Imports from China will face a 10% tariff over and above existing US tariffs.

The tariffs were set to take effect on Tuesday, but by Monday afternoon, Trump had announced a one-month delay for Canada and Mexico after both US neighbors agreed to take tougher measures to curb migration and drug trafficking at the border. That was a relief, especially considering the significant economic impact the new tariffs were expected to have. Bloomberg Economics, for example, estimated that the levies would have increased the average US tariff rate to 10.7% from around 3% currently, dealing a huge supply shock to the domestic economy. As a result, US GDP could suffer a 1.2% hit and a widely watched gauge of core inflation could increase by 0.7 percentage points, according to Bloomberg.

Despite the executive orders including "retaliation clauses" intended to discourage countries from responding in kind, all three nations vowed to take action anyway. Canada, for example, quickly announced 25% tariffs on over $100 billion worth of goods, including US alcohol, clothing, household appliances, and lumber (though these were also delayed by one month following Monday’s talks between Trump and Canada). China, which received no such delay and was hit with tariffs on Tuesday, retaliated by imposing levies on a wide range of US imports, launching an antitrust probe into Google, and introducing additional export controls on rare metals.

Trump’s actions, combined with China’s retaliation, significantly heightened the risk of an all-out trade war, rattling global markets at the start of the week, with stocks falling and the US dollar surging. Meanwhile, the Canadian dollar, Mexican peso, yuan, and euro all slid. Crypto markets also plunged as traders pared back exposure to risk assets.

Europe

Inflation in the eurozone unexpectedly accelerated last month, supporting the European Central Bank’s cautious approach to lowering interest rates despite the bloc’s slowing economy. Consumer prices increased by 2.5% in January from a year ago – up from December’s pace of 2.4% and defying economist estimates for an unchanged reading. Core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, stayed flat at 2.7% – disappointing analysts who had expected a small decline to 2.6%. Finally, services inflation dipped slightly but remained quite elevated, at 3.9%. All in all, the report underscored the persistent price pressures facing the bloc, even as the ECB remains confident that inflation will reach its 2% target this year.

UK

The Bank of England lowered its benchmark interest rate by a quarter of a percentage point to 4.5%, marking the third decrease since August and bringing borrowing costs to a 19-month low. Although the decision was unanimous, two officials advocated for a bigger half-point cut due to the stagnating UK economy and uncertainty over global trade. Still, the BoE signaled caution about the future outlook for rates, suggesting that only two more reductions were needed to bring inflation back to its 2% target.

Finally, the BoE’s updated forecasts did not make for pleasant reading among investors, as they reignited fears of stagflation. The bank now expects the economy to grow by just 0.75% this year – half of the 1.5% it had previously estimated in November. It increased its 2025 inflation forecast to 3.5%, from 2.75% previously.

Climate Change

During the 2015 Paris Accord, countries agreed to limit global temperature rises to “well below” 2C and “ideally” to 1.5C compared to pre-industrial levels. However, the planet breached that threshold for the first time in 2024. More specifically, the global average temperature last year was 1.6C above the pre-industrial baseline, according to a report last month by the Copernicus Climate Change Service. The agency also added that the years from 2015 to 2024 were the ten warmest on record. But it’s not all doom and gloom, with scientists quick to emphasize that the breach doesn’t mean a failure to uphold the Paris Accord, which is based on a longer-term temperature increase of more than a decade.

However, the breach has intensified calls for quicker and more decisive action to combat rising global temperatures. This has big implications for companies, which are likely to see surging financial costs over the coming decades due to the physical impacts of climate change. Without adaptation measures, these costs will average 3.2% per year of the value of real assets held by firms in the S&P 500 by the 2050s, according to the index provider. These costs are annual and cumulative over time, representing a material financial risk for many companies.

Most exposed is the communication services sector – especially firms that own and operate data centers, which are proving essential for the increasingly digital economy. After all, these assets are very sensitive to extreme temperatures and restricted water access due to their heavy cooling needs.

Next week

1. Monday: China loan growth (January). Earnings: McDonald’s, Vertex Pharmaceuticals.
2. Tuesday: Earnings: Coca-Cola, Super Micro Computer, Shopify, Gilead Sciences.
3. Wednesday: US inflation (January). Earnings: CME Group.
4. Thursday: UK GDP (Q4), eurozone industrial production (December), US producer prices (January). Earnings: Airbnb, Deere & Co, Coinbase, Applied Materials.
5. Friday: Eurozone GDP (Q4), US retail sales (January), US industrial production (January). Earnings: Moderna.