Uncertainty over tariffs sends global markets down

Towards the end of last year and into the new year, newsfeeds were flooded with announcements from Donald Trump regarding his new policies.

Towards the end of last year and into the new year, newsfeeds were flooded with announcements from Donald Trump regarding his new policies, marking a significant departure from the traditional focus of previous U.S. administrations on global aid and cooperation. Some of these announcements—many seen as negotiation tactics—suggest a shift toward a more fractured global economy, as Trump aims to reinstate American hegemony under his “Make America Great Again” agenda. As a result, market participants faced heightened uncertainty, forcing them to reassess expectations for inflation and global GDP growth. In financial markets, uncertainty translates to risk, and this unease was particularly reflected in the fixed income market. In the first two weeks of January, the term premium—the difference between yields on long-term bonds and short-term risk-free bonds—surged, signalling investors’ demand for higher compensation to take on duration risk. This, in turn, posed a challenge for risky assets, as higher discount rates led to valuation concerns. Additionally, rising yields in fixed income increased competition for capital across asset classes. One notable impact was the decline in the U.S. equity risk premium—measured as the spread between the forward earnings yield of the S&P 500 and the 10-year Treasury bond yield—to levels not seen since 2002. This raised questions about equity market valuations relative to long-term government bonds. To capitalize on declines in long-term Treasury yields, investors closely monitor the performance of ETFs such as TLT.

Over the past week, uncertainty surrounding Trump’s tariff policies has moved closer to reality, with Canada, Mexico, and China now targeted by 25% and 10% tariffs, respectively. While the threat of tariffs had already been looming, it remains difficult to distinguish between Trump’s genuine policy intentions and his negotiation tactics. However, the risk of these tariffs being fully implemented is now very real. Although the tariffs were originally set to take effect yesterday, they were postponed for 30 days following last-minute negotiations between the U.S. President and his Canadian and Mexican counterparts. Nevertheless, uncertainty is likely to persist in the short term, as the threat remains. In assessing the impact of these tariffs, two key factors must be considered: whether they will apply to specific goods or be implemented across the board—with the latter being significantly more disruptive. Unfortunately, it appears that the broad application of these tariffs is a strong possibility, introducing far-reaching consequences for industries deeply integrated into the global supply chain, such as automobile manufacturing and oil refining. Assuming that supply chains are already optimized, any forced adjustments will likely lead to higher costs, as importers are forced to settle for less efficient alternatives. While much remains uncertain, one thing is already clear: in the short term, this trade conflict will create no winners.

Economists at the Peterson Institute for International Economics have modelled the impact of trade tariffs on the economic growth and inflation trajectory of the U.S., Canada, and Mexico. Unfortunately, their findings indicate that all three countries will face economic repercussions. The institute estimates that U.S. GDP will be USD 200 billion lower than it would have been without tariffs over the course of Trump’s second term. Canada, with its smaller economy, is projected to lose USD 100 billion. A key factor in assessing the full impact on economic growth will be how effectively countries coordinate their response and retaliate against the U.S., which could pose long-term risks to U.S. economic growth. In the short term, tariffs will raise overall price levels, but they are unlikely to cause sustained inflationary pressures, as inflation requires continuous price increases rather than a one-time rise in the cost of goods. The immediate effects will likely be reflected in the next CPI report, particularly in volatile categories such as food and energy, while price increases in other sectors may depend on companies’ inventory levels. Another significant consequence of these tariffs and the resulting industrial shifts will be job losses, especially in industries deeply integrated into the global supply chain, such as automotive manufacturing and oil and gas.

The announcement of tariff implementation pushed Treasury yields higher on Monday, strengthening the U.S. dollar at the start of the week. The Dollar Index surged at market open, reaching 109.42 points (+0.97%) on Sunday, which in turn pressured gold prices lower by 0.97%, dropping from its closing price of USD 2,801.00 to an intraday low of USD 2,774.00. However, the commodity later recovered as the greenback erased some of its gains. In the near term, gold prices are expected to be supported by higher demand for safe-haven assets. The rising risk-off sentiment also weighed on Bitcoin, causing the digital currency to drop below the USD 100,000 threshold to USD 95,000 on Monday. Meanwhile, concerns over potential supply chain disruptions in the oil and gas sector drove Brent crude prices up by 1.00% during Monday’s session, before retreating following the postponement of the tariffs.

Asian equity markets closed in the red on Monday, with the Nikkei leading the decline, retreating 1.06%. While markets in mainland China were closed, the Hang Seng edged slightly lower by 0.04%. Taiwan and South Korea followed the downward trend, dropping 3.8% and 2.9%, respectively. In Europe, stocks also fell on Monday after Trump announced plans to impose tariffs on the continent, though without providing specifics. As a result, the STOXX 600 declined by 1.2%, led by a 1.6% drop in Germany's DAX, driven by automakers. Similarly, the CAC 40 in France fell 1.4%, while the FTSE 100 in the UK declined 1.3%. Across the Atlantic, an announcement during trading hours by the Mexican president, following a conversation with his U.S. counterpart, helped ease investor concerns. He stated that the U.S. would temporarily hold off on implementing tariffs on Mexican goods. In response, the Dow Jones Industrial Average recovered some of its earlier losses, closing down just 0.3%. However, the S&P 500 fell 0.8%, and the Nasdaq slid 1.2%.

Locally, the newly formed Monetary Policy Committee (MPC) held its first meeting yesterday, a week after the Federal Reserve maintained its benchmark rate. In its post-meeting statement, the MPC announced a 50-basis-point rate hike, restoring the Key Rate to 4.50%. Comments from Bank of Mauritius (BOM) Governors on rupee stabilization and foreign currency shortage measures led some market participants to anticipate higher local interest rates. As a result, Mauritian treasury yields had already risen since the start of the year, with the 2-year yield reaching 4.379% on Monday, its highest level since early 2023, when the MPC raised rates by a cumulative 150 basis points in November and December 2022. Consequently, the yield differential between 2-year Mauritian and U.S. Treasuries turned positive in January, averaging 12 basis points through February. On another note, the rate hike follows Moody’s recent rating action, which flagged rising debt costs—primarily denominated in Mauritian rupees—as a key risk for a potential credit downgrade.

On the equity front, SEMDEX started the week in positive territory, inching up 0.05% on Thursday, however the broad market index slid 0.13% on Friday following amid latest rating action of Moody’s. On Monday, the local index followed Asian and European markets down following tariffs announcements before reversing some of its losses on Tuesday. Heavyweight saw red in the past week, with the SEM-10 giving up 0.42% to reach 469.29 points. Performance was driven by MCBG, who recorded net foreign sales of Rs 59.7m during the week, amid prevailing risk off sentiment. Overall total market turnover (TMT) reached Rs 138.6m in the past week, down 25% due to the public holiday last Wednesday. Average daily turnover during the week fell 6.1% to reach Rs 34.6m, down from 37.0m in the week prior. Turnover was geared towards MCBG, which made up 61.4% of total market turnover. Foreigners were net sellers to the tune of Rs 54.3m (OM+DEM) with MCBG being the main driver of foreign outflow. Among other noticeable transactions, we note a net foreign inflow of RS 12.5m in fixed income instruments. On the banking counter. MCBG fell 0.95% to Rs 468.00. Similarly, SBMH fell 0.33% to Rs 5.98. Among Conglomerates. ENLG gained 2.38% to reach Rs 25.85 (+10.7% YTD). Similarly, CIEL gained 1.72% to Rs 9.48.  Among sugar conglomerates, Alteo gained 7.68% to Rs 14.00. Similarly, Terra gained 1.04% to Rs 24.25 (+16.6% YTD). Among hotels, LUX fell 1.82% to Rs 54.00. Similarly, NMHL fell 1.79% to Rs 13.70. Contrastingly, SUN gained 0.23% to Rs 43.25 (+7.2% YTD).