Well, I suppose we shouldn’t be surprised.  A tariff attack was promised by Donald Trump on the campaign trail and despite the counsel from the economics zeitgeist, his promise was delivered this weekend. The ink on thank-you notes for Canada’s help in the LA fires wasn’t even dry before a 25% across the board tariff was announced on Saturday. Mexico received the same treatment, and China got an additional 10% levy. While the measures were broadcasted there was, as always, some chaos in delivery last week as we were told that tariffs wouldn’t be imposed until March 1st.  What was predictable was the rapid and unified response from Canada, followed up with promised retaliation from Mexico and China. Now where?

Initial market reactions have also been predictable.  Equity markets are trying to factor in the potential negative repercussions to Canadian and U.S. growth, corporate earnings, inflation and monetary policy. I say try, not because the models can’t come up with a reasonable guess, but because we don’t know the duration of this tariff/trade war and what the next policy steps will be.

While many were watching the Grammys, Dow Jones futures were down 1.5% and NASDAQ 100 futures were off 2.6%. TSX futures had dropped around 1.5%. Similar declines have been seen in Europe, Asia and emerging markets this morning. After all, tariffs and trade wars are not conducive to global growth and if the probability of recession in one or several regions goes up, then stock valuations have to reflect that. This morning, we have seen U.S. equities pairing declines ever so slightly, but the focus here is what is happening with Canadian stocks and the damage has been tangible.

Minutes after the open, the S&P/TSX index was down north of 650 points, or 2.2%, at just under 24,900. Every sector has dropped except for materials, as gold prices have risen on the uncertainty created by Trump’s move. Heaviest hit has been healthcare, with a loss of 3.8%, but we have seen close to a 3% loss in consumer cyclicals, industrials and real estate.  Utilities and energy have seen declines of 1.2%.  At the time of writing, however, we have seen stocks pull up a bit, with the TSX trimming its loss to about 1.5%.

With risk assets on their heels, currencies of those countries targeted have also lost ground and that includes the Loonie.  Last night in Asia we saw the Canadian dollar break below 69 US cents and this morning we are trading a hair above this level. This is the weakest we have seen the currency since the first quarter of 2003 which was just a year after it reached a record low down in the 62 cent neighbourhood. The Mexican peso has also taken it on the chin and is trading above 21 pesos to the US dollar, which is close to a three-year low.

Another thing to look at is how the bond market is responding to the weekend’s announcements. As much as analysts have played up the potential inflation risks from tariffs and possible correction in bonds, we are actually seeing the traditional analysis play out – especially in Canada. Tariffs and trade wars are negative for economic growth and ultimately disinflationary. There has also been speculation that the Bank of Canada, coming off its decision to cut rates last week, will lower rates again before the next scheduled meeting. I wouldn’t bet on that just yet, as the Bank is in the same boat as all of us in terms of not knowing what the next steps will be. That said, Canadian bonds are rallying strong this morning, with the 2-year Government of Canada yield breaking below 2.5% and the 10-year yield testing its September lows under 2.9%. In other words, for investors that have a balanced portfolio, bonds are providing a backstop for now against losses in equities.

Investors are clearly going to be rattled by what we have seen this morning, but history has shown us that it is important not to take drastic portfolio decisions. For one, this situation is very much in flux.  All tariffs and non-tariff retaliatory measures are not going to be implemented until tomorrow.  That opens the door for 11th hour negotiations that could result in some measures being pulled back or deferred. The magnitude of the hit to U.S. markets and dialogue around the impact to American consumers could also prompt the White House to reconsider. Suffice to say, we will be monitoring this situation with laser focus as developments unfold. 

On behalf of the Pyle Wealth Advisory team, enjoy the rest of your week.

Andrew Pyle