By Janet H. Cho

Investors are bracing for global market volatility after the U.S. triggered a trade war between its closest neighbors and largest trading partners over the weekend.

President Donald Trump on Saturday imposed 25% tariffs on Canada and Mexico and 10% on China. Canadian energy products will be tariffed at 10%.

The leaders of Canada and Mexico quickly announced their own retaliation plans. While Canada and Mexico depend more on U.S. exports than the U.S. does on them, the moves could hit certain U.S. sectors and pocketbooks hard.

The immediate effects could be felt in stock and currency markets. The S&P 500 closed Friday down 0.5%, while the U.S. Dollar Index closed Friday at $108.49. Stock market volatility also moved higher.

Mexican and Canadian stocks also could see more volatility. Both closed down on Friday, with the iShares MSCI Mexico ETF down 2% at $48.98 and the iShares MSCI Canada ETF down 1.3% at $41.22.

Canadian Prime Minister Justin Trudeau said Canada would respond with $155 billion of tariffs on U.S. goods, starting on Tuesday with $30 billion on categories including beer, wine, and spirits, household appliances, lumber, and plastics. "We didn't ask for this but we will not back down," he said.

Mexican President Claudia Sheinbaum said Saturday that she had ordered "Plan B" tariff and non-tariff measures in "defense of Mexico's interests," saying that "Mexico does not want confrontation."

Robert Both, senior macro strategist at TD Securities, says U.S. inflation would be directly affected by the tariffs, estimating that the Canada and Mexico tariffs would lift their fourth quarter inflation forecast of 2.9% by another 0.45 percentage point.

Morgan Stanley economists also expect U.S. inflation to tick higher versus their baseline estimate for the next three to four months, putting headline inflation measured by the personal consumption expenditure index at 2.9% to 3.2%. Tariffs could hit U.S. economic growth by about a full percentage point, too, they said, moving real gross domestic product growth to the 1.2% to 1.6% range.

The S&P 500 index ended the week down 1% at 6,040, snapping a two-week winning streak, and its largest one-week point and percentage decline since the week ending Jan. 10, according to Dow Jones Market Data. The S&P 500 is up 2.7% so far this year.

The Dow Jones Industrial Average closed up 0.3% last week at 44,544.66, its third consecutive weekly gain. The Dow is up 4.7% this year.

The Nasdaq Composite Index closed down 1.6% last week, to 19,627.44, also snapping a two-week gain and its largest one-week point and percentage decline since the week ending Jan. 10. The Nasdaq is up 1.6% this year.

Write to Janet H. Cho at janet.cho@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

February 02, 2025 14:49 ET (19:49 GMT)

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