Assessing the Impact of U.S. Tariffs on Financial Markets
Author: The editor's desk
February 3, 2025
Members of AGF’s investment management team provide “rolling” commentary on the potential implications of a brewing conflict between the United States and many of its global trading partners following the former’s decision to slap tariffs on Canada, Mexico and China this past weekend.
(Updated at 3:59 pm EST)
On Materials
- Lumber: There is already an anti-dumping duty on Canadian lumber going into the U.S. Adding another 25% tariff makes Canadian lumber uneconomic at current levels. The U.S. produces enough lumber to supply approximately two thirds of their demand, but the remaining one third comes from Canada. There is potential for lumber prices to go up.
- Mining: We expect the impact of tariffs is likely to be little. In a global economy, raw product from Canada and Mexico could theoretically be sold elsewhere geographically with material from another country being sold to the U.S. Mining is not an industry which can suddenly ramp up production, so for metals like copper, the U.S. will remain reliant on global copper supply.
- Steel and aluminum: There is a lot of steel and aluminum which crosses the Canada/U.S. border in both directions. There are several U.S. companies with operations in both Canada and the U.S, so tariffs could impact their profitability. Producers which have 100% of production in the U.S. would benefit from tariffs.
- Packaging: Increased lumber costs would also increase pulp costs, so inputs would increase. If tariffs are put in place, one must wonder about price inflation on food and consumer good, squeezing already stretched finances, and therefore leading to a lower spending environment. Lower consumption of consumer goods would potentially lead to lower packaging demand.
- Cement/Concrete: We don’t expect major impacts. Generally speaking, these products tend to be locally produced and don’t travel long distances, so very little moves across the Canada/U.S. border. There is movement of cement across the Mexico/U.S. border, so there may be some Mexican companies who would be affected by tariffs if they are, in fact, enacted a month from now.
- Chemicals: The chemicals space is generally reliant on oil and a tariff war could increase oil pricing. Similar to packaging, inflation could lead to lower consumer consumption, and could therefore impact demand for goods which are chemicals-based.
John Kratochwil, Senior Analyst, AGF Investments
(Updated at 2:55 pm EST)
On the Canadian Dollar
- Canadian dollar weakness is likely to continue if the hardline stance on tariffs continues. Our long-standing views on this are that the U.S. dollar versus the Canadian dollar could see at least $1.50, but there could be potential upside to this figure.
- If Canada can achieve a tariff pause as Mexico did earlier today, this could help stabilize the Canadian dollar, and we perhaps could see some modest appreciation.
- There is a possible risk that the Bank of Canada delivers an intra-meeting cut which might trigger some additional softness in the Canadian dollar.
- Tariffs are a growth risk to the U.S. economy. The U.S. dollar has been enjoying a bull run partly due to the relative strength of the U.S. economy. We anticipate a threat to this economic exceptionalism would curb U.S. dollar appreciation, at least slowing its ascent.
Tom Nakamura, Currency Strategy and Co-Head of Fixed Income
On the Energy Sector
- Canada’s energy sector fared relatively better than other Canadian sectors given the difference in magnitude of tariffs enacted by the U.S. administration on Canadian imports. (10% on energy vs. 25% broadly on all other exports).
- The move to limit energy tariffs underlines the importance of Canada’s “heavier” blend of oil, which is necessary to produce the different kinds of petroleum products used by U.S. industries and not easily replaced given U.S production leans towards “light” and is better for producing gasoline and kerosene.
- Historically, oil from Mexico and Venezuela could have been used as a replacement but Venezuelan production has seen a precipitous decline since 2014 with limited ability to grow without significant investment, and Mexican production is being increasingly used internally.
- We expect that the additional costs imposed by the tariffs will be shouldered by both Canadian producers and U.S. refiners.
- A drop in the Canadian dollar (versus the U.S. dollar) may shield Canadian producers from some of this impact (but has no impact on U.S. refiners).
- Regardless, it seems clear that the addition of tariffs will add upward pressure to gasoline and diesel prices in the U.S.
Pulkit Sabharwal, Analyst, AGF Investments
On the Bank Sector
- We believe banks are a levered play on the economy and are likely to be affected by economic uncertainty and supply chain disruptions that may result from a protracted period of tariffs between the U.S. and its trading partners.
- Canadian and Mexican banks should be more exposed than the U.S as those economies are likely to have a more downgraded economic outlook. We expect this could manifest as larger provisions for credit losses and slower loan growth, which in turn could lead to lower earnings per share (EPS) growth projections.
- Canadian banks are well capitalized, so fallout for them may be reserved to an earnings growth headwind.
- Canadian banks with large exposure to the U.S may benefit from a weaker Canadian dollar (versus U.S. dollar) when translating their earnings, which should be a meaningful offset.
- We continue to expect a friendlier regulatory environment for U.S. banks, with leadership changes having already taken place at the Committee for a Responsible Federal Budget (CFRB) and Federal Deposit Insurance Corporation (FDIC), and those at the Officer of the Comptroller of the Currency (OCC) and the U.S. Federal Reserve (Fed) possibly still to come.
- The new head of FDIC has already stated that he’s looking to streamline bank capital rules and support bank mergers and acquisitions, however, U.S. loan growth has been lackluster, and the tariff uncertainty may hurt some companies’ intentions to invest at least in the near term.
Marko Kais, Analyst, AGF Investments
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
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