MW Markets brace for tariffs on Canada and Mexico to have 'immediate effects' on these sectors

By Christine Idzelis

'Tariffs are inflationary and can undermine revenue and earnings,' Wells Fargo's Paul Christopher says

The impact of the tariffs on Canada and Mexico that took effect on Tuesday is rippling through markets, with exchange-traded funds that target stocks in those two countries initially slumping sharply along with the U.S. equities market as investors attempt to sort out the ramifications of the new trade policy.

"Big picture, we believe tariffs are inflationary and can undermine revenue and earnings," Paul Christopher, head of global investment strategy at Wells Fargo Investment Institute, said in a note Tuesday. "We also foresee that importers will make various adjustments that should stretch out and dilute the tariff impacts."

The iShares MSCI Mexico ETF EWW slumped Tuesday morning but pared its decline to trade up modestly in the afternoon, according to FactSet data, at last check. The iShares MSCI Canada ETF EWC was also down sharply in morning trading but reduced its loss to around 0.8% on Tuesday afternoon - which exceeded the S&P 500's 0.3% decline.

"Tariffs on Canada and Mexico are likely to have immediate effects on both the autos and industrials sectors," BofA analysts said in a credit strategy note dated March 3. Canadian and Mexican corporate borrowers "should be more impacted by tariffs than their U.S. counterparts."

President Donald Trump said Monday afternoon that 25% tariffs on Canada and Mexico, which he had earlier paused, would take effect Tuesday. Canadian Prime Minister Justin Trudeau announced Tuesday on X that Canada would impose retaliatory 25% tariffs on American products.

In its note Tuesday on the latest round of tariffs, Wells Fargo Investment Institute indicated that it is favoring U.S. large-cap equities, Investment-grade taxable fixed income - particularly "in the maturity range of three to seven years" - and commodities.

"The 25% tariffs against Canada and Mexico that President Trump threatened in early February are now in place as of March 4, along with an additional 10% levy on Chinese goods," Christopher said. "Potentially more is to come."

Stocks and bonds in the U.S. were trading lower on Tuesday afternoon.

The iShares Core U.S. Aggregate Bond ETF AGG, which tracks an index of the U.S. investment-grade bond market, was down 0.3%, while the iShares IBoxx $ Investment Grade Bond ETF LQD shed 0.4%, FactSet data show.

"The retaliation from Canada and China was immediate but measured," Christopher said.

"Canada responded with $107 billion in tariffs on U.S. goods, including cars, steel and aluminum, to be phased in between now and March 25," he said. "China added 15% tariffs, to take effect next week, mainly on U.S. agricultural products, including soybeans, fruit and beef."

The top U.S. imports from Canada in 2023 included petroleum products, metals and machinery, according to the BofA note, which cited data from the U.S. International Trade Commission.

As shown in the BofA chart below, the top U.S. exports to Canada in 2023 were machinery, vehicles and metals.

U.S. tariffs on Canada and Mexico stand to impact both carmakers and suppliers to the auto industry, according to the BofA note.

Carmakers such as Ford Motor Co. $(F)$, General Motors Co. $(GM)$ and Stellantis $(STLA)$ "may face higher production costs due to the reliance on cross-border supply chains for parts and vehicles," the BofA analysts said. Suppliers to the automotive industry, like Magna International Inc. (CA:MG) $(MGA)$, American Axle & Manufacturing Inc. $(AXL)$, Lear Corp. $(LEA)$ and Aptiv $(APTV)$, "could see margin pressure as they reevaluate production strategies," they cautioned.

Looking at diversified industrials, "most companies are not as heavily levered to Mexico and Canada, but we could see a little pressure on names like Caterpillar, Deere, and others, that are sensitive to commodity costs and global supply distributions," the BofA analysts said.

Shares of Caterpillar Inc. $(CAT)$ and Deere & Co. (DE) were falling Tuesday, with Caterpillar shedding 0.7% and Deere down 1%, according to FactSet data, at last check.

Beverages is the subsector "most directly exposed to tariffs on Mexico," according to the BofA note, which cited Constellation Brands Inc. $(STZ)$, Bacardi and Diageo $(DEO)$ as potentially affected corporate borrowers.

Other exposed subsectors are "pockets of consumer products" such as recreational vehicles, appliances and toys, as well as food ingredients, agriculture costs and packaging, the analysts said. That will impact "consumer goods and will weigh on consumer spending power."

In imposing 25% tariffs on Canada, Trump carved out a 10% levy on oil, Christopher noted.

"Canadian crude oil is a heavy grade that U.S. refiners cannot easily replace," he said. "This is likely why the tariff is only 10%, but even that tariff level could raise gasoline prices."

The S&P 500 SPX has broadly lagged international stocks so far in 2025.

But the U.S. equities benchmark's year-to-date decline of 0.7% is only slightly greater than the 0.4% loss for the iShares MSCI Canada ETF so far this year, according to FactSet data, at last check.

The iShares MSCI ACWI ex US ETF ACWX, which tracks an index of stocks in developed and emerging markets but excludes the U.S., is up around 7% so far this year, according to FactSet data. The iShares MSCI Mexico ETF also had a year-to-date gain of around 7% as of Tuesday afternoon.

-Christine Idzelis

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March 04, 2025 15:51 ET (20:51 GMT)

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