Trump Tariffs Shock Markets: S&P 500 Drops 1.64% on Trade War Fear

Also, 30-year T-bond, gold, natural gas and Canadian dollar futures

1. Nasdaq 100 E-mini futures (/NQ): -1.81% 
2. 30-year T-bond futures (/ZB): +0.74% 
3. Gold futures (/GC): +0.64% 
4. Natural gas futures (/NG): +8.51% 
5. Canadian dollar futures (/6C): -1.19% 
   

The Trump tariffs are here, signaling the start of a new American-led trade war. Tariffs against Canada, Mexico and China are set to hit 43% of U.S. imports, approximately 5% of GDP. Using the Federal Reserve’s tariff model from the first Trump term, Bloomberg Economics estimates gross domestic product (GDP) will drop by 1.2% and inflation (core PCE) will rise by 0.7%; from current levels, this would leave the U.S. economy in a stagflationary lurch. But are the tariffs a means to an end—halting the flow of fentanyl and curbing illegal immigration—or are they the ends themselves? President Donald Trump has scheduled with Canadian and Mexican leadership today, so traders should be on the watch for more headline-driven volatility.

Traders pulled back from risk assets to start the week, with this morning’s trading seeing selling across the U.S. equity market. Nasdaq futures (/NQH5) were down 1.76% ahead of the New York open. President Trump’s 25% tariff on imports from Canada and Mexico marked a major escalation in trade tensions between the U.S. and two of its biggest trading partners. General Motors (GM) fell 7% in pre-market trading, while Ford (F) trimmed about 4% from its price.

The risk-off tone across markets is driving flows into the Treasury markets where traders are seeking some safety. The 30-year T-bond futures (/ZBH5) were 0.74% higher in morning trading. The underlying yield for the contract fell to 4.735%, near its lowest since late December. Bond traders will digest corporate earnings this week before Friday’s jobs report crosses the wires, which could move the needle again for the direction of yields.  

Gold prices (/GCJ5) rose to start the week as traders returned to news of fresh tariff announcements on Mexico and Canada. The move higher comes despite a rising dollar, as the trade measures sent the Mexican peso and Canadian dollar lower while at the same time spurring a safe-haven bid in the dollar. Gold is exhibiting its strength as a safe-haven asset amid rising market volatility.  

Natural gas prices (/NGH5) surged higher today as Trump’s tariff announcements sent a shock to energy markets. While the U.S. will levy a smaller tariff on energy products, it didn’t help ward off a volatile reaction in energy products. The United States sources about 90% of its imported natural gas from Canada. Today’s move higher comes even as the temperature outlook for February across much of the United States remains on the mild side. The trade measures likely shifted the floor higher for natural gas prices through the rest of the winter because it will affect the flow of energy products, particularly in North America.  

Canadian dollar futures (/6CH5) fell over 1% this morning, the largest daily percentage drop since October 2022. The selloff comes after the announcement of tariffs by the United States, which will trigger retaliatory tariffs from Canada. Prime Minister Justin Trudeau put a 25% tariff on $155 billion worth of U.S. goods in response to the Trump administration’s tariffs. Canada’s immediate retaliation leads others to believe that many other countries, including those in Europe will soon announce, perhaps preemptively, their own tariffs, should their goods be targeted. This could lead to a more volatile environment for FX products in the coming weeks and months.  

Christopher Vecchio, CFA, tastylive’s head of futures and forex, has been trading for nearly 20 years. He has consulted with multinational firms on FX hedging and lectured at Duke Law School on FX derivatives. Vecchio searches for high-convexity opportunities at the crossroads of macroeconomics and global politics. He hosts Futures Power Hour Monday-Friday and Let Me Explain on Tuesdays, and co-hosts Overtime, Monday-Thursday. @cvecchiofx

Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. #@fxwestwater
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