While chatting with reporters on Air Force One, Trump mentioned he would be announcing a 25% tariff on all steel and aluminum imports into the U.S. on Monday, with more reciprocal tariffs to be revealed on Tuesday or Wednesday.
His remarks came right after German Chancellor Olaf Scholz stated that the European Union is prepared to react "within an hour" if the U.S. imposes tariffs on European products, raising concerns about a potential trade war. Meanwhile, China's retaliatory tariffs on certain U.S. exports are set to kick in on Monday, and there’s still no sign of any progress in talks between Beijing and Washington.
"These could be a strategic negotiating tool for President Trump or the beginning of a prolonged trade war," said Stephen Dover, head of the Franklin Templeton Institute.
"Nearly half of U.S. imports serve as inputs for domestic companies, meaning businesses will either have to pass higher costs to consumers, absorb lower margins or adjust supply chains entirely."
Analysts believe that currencies from countries targeted by Trump are likely to drop against the dollar, which could help offset some of the taxes and keep their exports competitive. Tariffs might also push U.S. inflation higher, making it harder for the Federal Reserve to loosen its policies.
Markets have already reduced their expectations for rate cuts this year to about 36 basis points, down from around 42, after a positive payroll report on Friday. Fed Chair Jerome Powell is set to speak before the House of Representatives on Tuesday and Wednesday, and the effect of tariffs on policy is expected to be a major topic.
His testimony on Wednesday will come right after consumer price data for January, which could indicate early inflation pressures, especially since there are reports of companies raising prices in anticipation of the taxes. A consumer survey released on Friday showed a significant increase in inflation expectations for the coming year, although the long-term outlook remained more stable.
DOLLAR RISES WITH YIELDS
Investors pushed the dollar up, with its index steady at 108.38. The euro slipped 0.2% to $1.0305, and the Australian dollar, which is sensitive to trade, dropped 0.3% to $0.6253. The dollar also gained 0.4% against the yen, reaching 152.02, recovering some losses amid speculation that the Bank of Japan might hike rates soon.
The MSCI index tracking Asia-Pacific shares outside Japan dipped 0.1%, while Japan's Nikkei remained unchanged. South Korea's main index fell 0.2%, primarily due to declines in steel companies.
Chinese blue chips stayed mostly stable, with concerns about deflation eased by data showing consumer inflation rose to its highest in five months in January.
EUROSTOXX 50 futures increased by 0.2%, along with FTSE futures, while DAX futures climbed 0.1%. Wall Street futures started off lower but quickly bounced back as investors anticipated a busy week of earnings reports. S&P 500 futures rose by 0.2%, and Nasdaq futures gained 0.3%.
Last week, shares were shaken by mixed earnings results, but overall earnings per share growth is currently at 12%, surpassing initial expectations of 8%.
"Tariffs are a key downside risk to our 2025 EPS forecasts," warned analysts at Goldman Sachs, who estimated that the effective U.S. tariff rate would likely rise by five percentage points, knocking 1% to 2% off earnings per share.
"Heightened policy uncertainty represents downside risk to valuation because it raises the equity risk premium and implies downward pressure on fair value," they said in a note.
Treasuries took a hit as concerns about inflation resurfaced, pushing the yield on 10-year notes up to 4.495%, compared to last week's low of 4.400%.
Meanwhile, despite a strong dollar and rising yields, gold prices soared to record highs of $2,886 an ounce, partly fueled by speculation that Trump might impose tariffs on the metal.
This has sparked a surge in demand for physical gold in London, with shipments heading to the U.S. to dodge potential new taxes, leading to a shift from LME gold futures to Comex futures. On Monday, gold was up 0.3% at $2,869 per ounce.
In contrast, oil prices struggled due to fears that a trade war could dampen global economic growth and energy demand.
However, after three weeks of losses, the market saw a slight recovery, with Brent crude rising 42 cents to $75.08 and U.S. crude increasing by 39 cents to $71.39 per barrel.