Trump Intensified The Trade War

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

1. Trump imposed tariffs on imports from Canada, Mexico, and China.
2. Chinese authorities set a 2025 economic growth target of around 5%.
3. Eurozone inflation fell less than expected.
4. The European Central Bank lowered interest rates.
5. Oil prices tumbled to their lowest level in three years.
6. Crypto prices jumped after Trump reiterated his plan for a US digital asset reserve.

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

Trade War

In early February, Trump announced tariffs of 25% on all imports from Canada and Mexico, except for Canadian oil and energy products, which will face a 10% rate (Canada is by far the biggest foreign oil supplier to the US, accounting for about 60% of its crude imports). Additionally, he imposed an extra 10% levy on Chinese imports over and above existing US tariffs.

A few days later, the president delayed the implementation of the tariffs on Canada and Mexico until March 4, but did not extend the same postponement to China. And this week, as the March 4 deadline passed, Trump followed through on his threat, imposing sweeping import levies on Canada and Mexico while doubling the existing tariff on China to 20%. But the president did another U-turn a few days later, signing an executive order on Thursday saying that all goods that met the rules of a 2020 free trade deal (known as “USMCA”) with Canada and Mexico would be granted a one-month reprieve from the duties.

Stocks fell sharply after the initial March 4 news, and it’s not hard to understand why: the new duties on three of the US’s biggest trading partners impact roughly $1.5 trillion in annual imports. What’s more, the move drew quick responses from Canada and China, increasing the threat of a wider and more damaging trade war. Canada hit back with phased levies on $107 billion worth of US goods, while China imposed tariffs as high as 15%, mainly on American agricultural shipments. China also retaliated by targeting US firms, placing 10 companies on a national security blacklist and slapping export controls on 15 others. And while Trump delayed the tariffs on Canadian and Mexican goods covered by USMCA, the constant back-and-forth is starting to seriously hurt consumer, business, and investor sentiment.

China

Chinese authorities announced a 2025 economic growth target of “around 5%” – in line with expectations and matching the government’s target in the previous two years. The ambitious goal comes despite a slowdown in the domestic economy and mounting trade tensions with the US, raising expectations for officials to unleash more stimulus later this year. In fact, China backed up its growth strategy by setting the highest fiscal deficit target (the amount by which its spending exceeds its income) in over three decades, at 4% of GDP. It also committed to increasing local government bond issuance to record levels. But in a subtle admission of the deflationary pressures facing the economy, the government lowered its official target for consumer price increases to around 2% – the lowest since 2003.

The GDP target announcement came just days after Trump doubled fresh tariffs on China to 20%, posing a big threat to the export sector that contributed to nearly a third of the country's economic expansion last year. Economists suggest that if Trump implements the 60% levy he mentioned during his campaign, it could knock two percentage points off China’s growth this year.

Europe

New data this week showed eurozone inflation eased in February for the first time in four months, though by less than economists had expected. Consumer prices rose 2.4% last month from a year ago – down from January’s 2.5% pace but above forecasts of 2.3%. However, two measures of underlying inflation also ticked down, which economists said would bolster the European Central Bank’s confidence in lowering borrowing costs. Core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, fell to 2.6% from 2.7% – a level it has hovered at since September. Meanwhile, services inflation, a measure closely watched by the ECB for signs of domestic price pressures, dipped from 3.9% to 3.7% – the lowest level since April 2024.

Speaking of the ECB, the central bank lowered its benchmark interest rate by a quarter of a percentage point to 2.5% and signaled a possible slowdown in future cuts, as inflation cools and the economy digests huge shifts in geopolitics. The widely expected move was the sixth reduction in the deposit rate since the ECB started its rate-cutting cycle last June.

The ECB also lowered its growth forecast for 2025 – its sixth successive downgrade for the year – as well as for 2026. It now expects eurozone GDP to increase by only 0.9% this year, compared with its December projection of 1.1%. However, these growth expectations don’t factor in recent moves by Friedrich Merz, Germany’s chancellor-in-waiting, to unleash hundreds of billions of euros in borrowing to boost defence and infrastructure spending. Finally, the ECB raised its inflation forecast for this year to 2.3% from a previous estimate of 2.1%, on the back of higher energy prices.

Oil

Oil prices tumbled this week to their lowest level in three years, as a couple of factors hit traders’ sentiment. First, OPEC+ surprised the market on Monday by announcing that it would proceed with a previously delayed plan to pump more crude starting in April, ending its long-standing production cuts. The cartel’s decision means eight members of the group, including Saudi Arabia and Russia, will increase production by a combined 120,000 barrels a day in April and a combined 2.2 million barrels a day over the next 18 months. Second, traders are becoming concerned that Trump’s escalating trade war will slow global economic activity and reduce demand for crude. Adding to these fears, a US Energy Information Administration report this week showed a much bigger-than-expected increase in American crude oil stockpiles.

Crypto

The crypto market kicked off March with a strong rally, recovering some of its losses from February – the sector’s worst month since 2022 – after Trump reiterated his plan for a national stockpile of digital assets. In a Truth Social post on Sunday, Trump said he’s directing the Presidential Working Group on Digital Assets to move forward with a crypto strategic reserve that would include not only bitcoin and ether, but also XRP, cardano (ADA), and solana (SOL).

A reserve has been championed by crypto traders, who believe the move would offer legitimacy to the asset class. But despite all the excitement, many of the details of Trump’s plan are unknown, including how much the government will actually buy and how the purchases would be funded.

Next week

1. Monday: Earnings: Oracle.
2. Tuesday: Japan GDP (Q4), US job openings and labor turnover survey (January).
3. Wednesday: US inflation (February). Earnings: Adobe.
4. Thursday: Eurozone industrial production (January).
5. Friday: UK GDP (January), US consumer sentiment (March).