As United States (US) President-Elect, Donald Trump, starts the transition into his next term, a slew of policy reforms are taking centre stage.
Key themes for the week:
- Trump’s tariffs and fears of trade wars are once again giving the markets the jitters
- US Treasury yields retreat to near one-month lows
- US equities take a breather following fresh record highs
- Easing of over-supply concerns supports oil prices
TRUMP TARIFFS
This week, Trump unveiled sweeping tariffs to reshape US trade dynamics with key partners. The proposals include a 25% tariff on goods from Mexico and Canada, targeting issues of immigration and drug trafficking, and a 10% tariff on Chinese imports, with a specific focus on stemming the flow of fentanyl, a synthetic opioid drug. These announcements have sparked heated responses domestically and internationally, casting uncertainty on global trade relationships and economic stability.
The rationale behind the tariffs
Trump has framed these tariffs as essential to addressing critical challenges like illegal immigration, drug trafficking, and domestic manufacturing vulnerabilities. His comments link China’s role in the production of fentanyl, which is said to be fuelling the US drug crisis, to the need for economic pressure. Meanwhile, the tariffs on Mexico and Canada are tied to broader US national security concerns despite their potential conflict with existing agreements like the United States-Mexico-Canada Agreement (USMCA).
The push back to tariffs
Beijing has vehemently opposed Trump’s plans, labelling the tariffs as a deflection from America’s internal issues. A spokesperson for China’s Ministry of Commerce emphasised that such unilateral actions violate World Trade Organisation rules and undermine the prospect of stable economic ties. Analysts warn that these measures could reignite a trade war that is even more disruptive than that of Trump’s first term, which disrupted supply chains and increased consumer costs due to tariffs of 7.5% to 25%.
China’s state media has simultaneously criticised the tariffs while highlighting American businesses like Apple, Tesla, and Starbucks as examples of positive US-China collaboration. This approach mirrors tactics seen during the last trade war, where Beijing’s retaliation targeted politically sensitive sectors while sparing companies viewed as cooperative.
Mexico and Canada, both major US trade partners, have expressed alarm over the proposals. Mexican President, Claudia Sheinbaum, warned of retaliatory tariffs, noting that such actions could violate the USMCA and harm both economies. Mexico’s Economy Minister, Marcelo Ebrard, pointed out that the automotive industry – a cornerstone of US-Mexico trade – would bear the brunt of these tariffs, potentially raising vehicle prices by thousands of dollars for US consumers. Canada has also voiced concerns. Even US President, Joe Biden, is urging Trump to reconsider the plans to avoid straining relations with close allies. Analysts argue that a trade war with Canada and Mexico would jeopardise regional economic integration and risk significant job losses in the US.
Economic and strategic implications
Economists and industry experts have highlighted the potential for significant disruptions. Mexico’s automotive sector, responsible for nearly 25% of North American vehicle production, could suffer devastating losses, while American consumers might face rising costs. At the same time, analysts caution that targeting China with tariffs to address non-trade issues, such as the fentanyl crisis, risks broadening economic conflicts with unclear outcomes.
During Trump’s first term, Beijing introduced the concept of an “Unreliable Entity List” to counter US actions, though it was sparingly used. Experts believe China may initially exercise restraint but could retaliate more forcefully if its commercial interests are significantly harmed.
The path forward
With the USMCA up for review in 2026, Trump’s tariff proposals could lead to contentious renegotiations or broader economic divisions among the three member countries. Meanwhile, a renewed trade war with China could destabilise the global economy and worsen inflationary pressures.
Whether these tariffs achieve their intended goals or exacerbate existing challenges remains to be seen. What is clear, however, is that the stakes are high for US businesses, global trade, and economic stability. As Trump’s policies take shape, their long-term impact will depend on how effectively they address their stated objectives without triggering unintended consequences.
A VIEW OF THE MARKET
Bonds
The yield on the 10-year US Treasury note dropped to 4.26%, hitting a one-month low as markets digest economic data. Core Personal Consumption Expenditure (PCE) prices aligned with expectations in October, indicating progress toward the US Federal Reserve’s (Fed’s) inflation target. Personal spending and income exceeded forecasts, while Fed minutes revealed caution due to inflation and economic uncertainty. Markets now price a 66.5% chance of a December rate cut, with 50 basis points of cuts anticipated for 2025.
The United Kingdom (UK) 10-year gilt yield fell to 4.32%, following weak retail sales which were down 0.7% in October, a contracting manufacturing Purchasing Managers’ Index (PMI), and rising inflation at 2.3% which exceeds the Bank of England’s (BoE’s) 2% target. Financial markets predict modest UK rate cuts next year, with a 19% probability of a 25-basis-point reduction at the BoE’s December meeting.
South Africa’s 10-year government bond yield rose to 9.15%, responding to a cautious 25-basis-point cut by the South African Reserve Bank (SARB). South Africa’s headline inflation dropped below the target range at 2.8% in October, but uncertainties persist. The SARB, however, anticipates economic recovery fuelled by structural reforms.
Equities
The US market was closed on Thursday to celebrate Thanksgiving. US equities fell on Wednesday after hitting record highs earlier in the week. The S&P 500 and Dow Jones dropped 0.4% and 0.3%, respectively, while the Nasdaq 100 slid 0.8%. Tech stocks saw sharp losses, with Nvidia, Meta, and Microsoft retreating over 1%, while Dell and HP fell more than 11% on weak earnings guidance. Economic resilience was underscored by third-quarter US gross domestic product growth of 2.8% and low jobless claims, but the PCE Index suggested that progress on lowering US inflation has stalled.
The UK’s FTSE 100 rose amid low trading volumes during the US Thanksgiving holiday. Insurance company, Direct Line’s shares surged 41% after rejecting a takeover bid from fellow insurer, Aviva. Footwear manufacturer, Dr Martens shares climbed 21% following a trading update.
Germany’s DAX gained 0.7%, driven by strength in tech and auto sectors, as semiconductor sales to China faced fewer restrictions than anticipated. Inflation in Germany and Spain came in softer than expected, tempering the need for aggressive European Central Bank (ECB) rate cuts.
Commodities
Gold extended its gains to $2,645/ounce, supported by the anticipation of lower interest rates, as investors took positions reflecting confidence in further Fed easing.
Oil steadied around $73/barrel, with the expanded Organisation of the Petroleum Exporting Countries, OPEC+, deliberating a production increase delay. US crude inventories fell by 1.8 million barrels last week, easing oversupply concerns, while geopolitical tensions in the Middle East appear to be easing.
Currencies
The US Dollar Index remains around 106.1, with traders adjusting expectations for a December rate cut. Trump’s nomination of Scott Bessent as US Treasury Secretary has provided some market stability.
The euro is hovering near $1.05/€, with soft German inflation data reinforcing a cautious ECB stance. Meanwhile, the British pound approached $1.26/£, recovering from six-month lows as investors balanced poor UK economic data with Trump’s protectionist policies.
South Africa’s rand firmed slightly to R18.10/$, buoyed by higher gold prices, while continuing to find support in an improved South African economic outlook.
Key indicators:
USD/ZAR: 18.07
EUR/ZAR: 19.10
GBP/ZAR: 22.97
GOLD: $2,663
BRENT CRUDE: $72
Sources: Refinitiv, Bloomberg, Trading Economics, The Hill, BBC and PBS.
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.
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