
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.
(Updated on February 4, 2025 at 5:11 pm EST)
On European Equities
- The new U.S. administration has focused its tariff threats mostly on Canada, Mexico and China to date, but Europe may be in its sights as well.
- We believe any U.S. tariffs imposed directly on Europe would depress the outlook for domestic-orientated European stocks, many of which are already negatively impacted by the lack of economic growth in Europe.
- This may lead the European Central Bank to cut interest rates more than expected, which would have a negative impact on the banking sector.
- Some European companies with supply chains in North America may also be impacted by any U.S. tariffs that could still be implemented on Canadian and Mexican imports despite being postponed on Monday. This could encompass industries such as Autos, Capital Goods, Steel, Building Materials and Beverage Makers.
- The MSCI Europe Index has outperformed its U.S. counterpart so far in 2025 and a positive start to fourth quarter earnings season may help assuage U.S. tariff fears for now.
Richard McGrath, Portfolio Advisor, AGF Investments
On China and U.S. Consumer Durables Stocks
- New U.S. tariffs on Chinese imports that came into effect earlier today may not have the same effect on U.S. consumer durables stocks as the 2018/19 round of tariffs from U.S. President Trump’s first term.
- U.S. consumer durables producers have diversified their China-centric sourcing to now include Asian countries such as Vietnam, India, Indonesia, Cambodia, Thailand and Bangladesh.
- As such, some categories such as athletic footwear should see minimal impact on any incremental tariff being levied on China (with exceptions).
- There are categories of U.S. imported goods that still have a sizeable exposure to China, namely appliances, furniture, fashion apparel, toys, value goods sold at dollar stores, and after-market auto parts.
Henry Kwok, Senior Analyst, AGF Investments
(Updated on February 4, 2025 at 9:33 am EST)
On Equity Markets
- Following a volatile start to the week, equity investors may get some relief now that the U.S. administration has agreed (as of late Monday afternoon) to delay tariffs on Canadian goods entering the U.S. for at least the next month. In return, Canada’s government has agreed not to retaliate with its own suite of tariffs on U.S. goods entering Canada.
- This follows a similar agreement made earlier on Monday between the U.S. and Mexico postponing U.S. tariffs on Mexican imports (also for one month).
- Despite these delays, the U.S. plan to slap new 10% tariffs on Chinese goods went into effect Tuesday morning. China retaliated soon after with its own tariffs on select U.S. goods.
- We expect equity markets in North America to remain choppy until a final resolution on tariffs is reached between the U.S., Canada and Mexico in the coming days, weeks or even months ahead.
- More broadly, U.S. tariffs on Chinese goods (and retaliatory measures by the Chinese government) may continue to effect global stock prices in the days ahead, as could the potential for new tariff measures between the U.S. and the European Union.
John Christofilos, Chief Trading Officer, AGF Investments
(Updated on February 3, 2025 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 on February 3, 2025 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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