'Just the first strike': Trump tariff on China & stock market impact, tit-for-tat responses & looming trade war

With the US president Donald Trump announcing tariffs of 25 per cent on Mexico and Canada and an additional 10 per cent duty on China effective 12 am on Tuesday, global markets are reeling under pressure, as stock analysts and economists believe a deal before the deadline is unlikely, with any tit-for-tat responses this week are likely to only escalate the trade war and the risk of further non-dollar foreign currency depreciation.

Japan's Nikkei 225 plunged 2.9 per cent, South Korea's Kospi dropped 2.56 per cent and Hong Kong's Hang Seng declined 0.9 per cent. The mainland Chinese indices fell up to 1.4 per cent. India, in comparison, was down 0.6 per cent.

"Markets will be focused on the negative growth and higher inflation implications from tariffs. It supports further our US economics team’s view that the Fed will not cut rates again this year. Taking these factors, in combination with US economic outperformance and US exceptionalism, into account, we expect the stronger dollar path to remain in place," Nomura said in note.

Capital Economics said it is just the first strike in what could become a-very destructive global trade war. Imports from the European Union will be hit- within the next month or two and a universal tariff is coming in April, it warned. 

It does not expect any deal that sees these tariffs removed any time soon, although it's possible that more sectors could be added to the exemption.

Canada ($419 billion), China ($427 billion) and Mexico ($475 billion) together account for 43 per cent or $1.3 trillion of the $3.1 trillion value of goods imported into the US in 2023. 

"We do not rule out global risk-off sentiment due to a sharp increase in uncertainty in the global economic outlook. Valuations are rich and earnings are muted to provide much support for the Indian market," Kotak Institutional Equities said.

Vikram Kasat of PL Capital  said it is fascinating to see how investors react to something they have known was coming and which was almost universally seen as damaging for economic growth and financial assets. Investors, he believed were not surprised, but still shocked.

"For now, India is not affected. Therefore, the impact on the Indian market will be less. But the spike in the dollar index to above 109.6 will trigger more selling by FIIs putting the market under pressure," said V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

Emkay Global said the tariffs would relatively benefit Indian exports to the US, but that should be negated by China’s likely price cuts. Another round of dollar appreciation, which would hurt equities and the currency, is likely, it said. 

Nomura said it had not doubted Trump’s resolve in implementing tariffs and sees risks from here as skewed towards more tariffs on the rest of world, especially on Europe, as has been stated by Trump. 

"The timing of any further tariffs is unclear, but we see some risk that a broader world tariff could be imposed after April 2025, when Trump receives detailed reports related to the America First Trade Policy. The other date to watch for China is April 5, when the 75-day grace period for TikTok ends," Nomura said.