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Asian shares struggled for direction on Monday, while the U.S. dollar edged higher as global markets reacted to President Donald Trump’s announcement of new tariffs. Trump warned that a 25% tariff on all steel and aluminum imports would be unveiled Monday, with additional reciprocal tariffs on other goods expected later in the week.
The move has stoked fears of a trade war, particularly after German Chancellor Olaf Scholz warned that the European Union would respond “within an hour” if the U.S. imposed duties on European goods.
Meanwhile, China’s retaliatory tariffs on some U.S. exports are set to take effect on Monday, with no progress in sight between Washington and Beijing.
Tariffs Could Fuel Inflation, Limit Fed Rate Cuts
Economists and analysts are split on Trump’s true intentions—whether this is a negotiating tactic or the beginning of a prolonged trade war.
Stephen Dover, head of the Franklin Templeton Institute, noted that nearly half of U.S. imports serve as inputs for domestic companies, meaning businesses will:
- Pass higher costs onto consumers
- Absorb lower profit margins
- Completely restructure supply chains
With inflation still a major concern, tariffs could push prices even higher, potentially forcing the Federal Reserve to reconsider its expected interest rate cuts.
Markets Adjust to Higher Inflation Risks
Investors have already scaled back their expectations for rate cuts this year to just 36 basis points, down from 42 basis points, after last Friday’s strong U.S. jobs report.
Fed Chair Jerome Powell is set to testify before the House of Representatives on Tuesday and Wednesday, where the potential impact of tariffs on monetary policy will likely be a central topic. His testimony will follow the release of January’s consumer price data, which could reveal early signs of price increases linked to trade policies.
Global Currencies React to Tariff News
The U.S. dollar gained ground as investors sought safety:
- Dollar Index firmed at 108.38
- Euro dipped 0.2% to $1.0305
- Australian dollar fell 0.3% to $0.6253
- Dollar rose 0.4% against the yen to 152.02
Analysts expect currencies from countries targeted by tariffs to weaken against the dollar, helping offset the impact of new U.S. duties on exports.
Asian Stock Markets React Cautiously
Asian equities saw mixed trading as investors weighed tariff risks against corporate earnings and economic data:
- MSCI’s Asia-Pacific index (excluding Japan) fell 0.1%
- Japan’s Nikkei remained flat
- South Korea’s KOSPI dropped 0.2%, with steelmakers hit hard
- Chinese blue-chip stocks were unchanged, as worries about deflation were eased by a five-month high in consumer inflation
European and U.S. Markets Eye Earnings and Policy Risks
Despite trade tensions, European stocks saw minor gains:
- EUROSTOXX 50 futures rose 0.2%
- FTSE futures gained 0.2%
- DAX futures added 0.1%
On Wall Street, markets initially opened lower but rebounded as investors looked ahead to corporate earnings:
- S&P 500 futures rose 0.2%
- Nasdaq futures added 0.3%
While some earnings reports last week were mixed, overall earnings per share (EPS) growth is running at 12%, above initial expectations of 8%.
However, Goldman Sachs analysts warned that tariffs pose a key downside risk to 2025 earnings. They estimate:
- The effective U.S. tariff rate will rise by five percentage points
- This could cut S&P 500 EPS by 1% to 2%
- Uncertainty over trade policy could raise the equity risk premium, pressuring valuations
Gold Hits Record High as Investors Seek Safe Haven
While rising Treasury yields have put pressure on some asset classes, gold prices soared to a record high on speculation that Trump may impose tariffs on gold imports.
- Gold climbed 0.3% to $2,869 per ounce
- Investors in London have been rushing to ship physical gold to the U.S. to avoid potential tariffs
Oil Prices See Modest Rebound After Three Weeks of Losses
Despite concerns that a trade war could hurt global energy demand, oil prices bounced back after three consecutive weeks of declines:
- Brent crude rose 42 cents to $75.08 per barrel
- U.S. crude climbed 39 cents to $71.39 per barrel
Looking Ahead: Key Market Events This Week
Markets will closely watch Trump’s official tariff announcements and reactions from China and the EU. Other key events include:
- Fed Chair Jerome Powell’s testimony before Congress
- U.S. consumer price inflation report for January
- Corporate earnings from major firms
As trade tensions rise, investors remain on edge, bracing for potential market volatility in the weeks ahead.
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