Dow Futures Tumble, Oil Surges After Trump Tariffs End ‘Self Delusion in Markets’

U.S. stock-index futures opened significantly lower on Sunday night, while oil prices surged, as investors braced for heightened market volatility following President Donald Trump’s announcement of steep tariffs on imports from Canada, Mexico, and China.

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Analysts noted that the sweeping trade measures—25% tariffs on Canadian and Mexican imports, an additional 10% levy on Canadian energy products, and another 10% duty on Chinese goods—would unsettle investors who had previously assumed Trump’s tariff threats were either a bargaining tactic or would be implemented gradually.

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“Trump has put an end to the illusion in markets, the media, and political circles that his tariff threats should not be taken seriously. It took him only three weeks since taking office to raise tariffs on Canada, Mexico, and China,” stated Philip Marey, a senior U.S. strategist at Rabobank, in a note on Sunday.

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As Asian markets opened the trading week, U.S. stock futures reflected widespread investor unease. Dow Jones Industrial Average futures fell roughly 650 points, or 1.5%, while S&P 500 futures declined 2% and Nasdaq-100 futures dropped 2.6%. In Asia, Japan’s Nikkei 225 tumbled 2.6%, and Hong Kong’s Hang Seng Index edged down 0.4%.

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Bitcoin, which has shown a strong correlation with the S&P 500, also slumped over the weekend. After trading around $106,000 on Friday morning, the largest cryptocurrency had fallen to approximately $93,900 by Sunday night.

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U.S. stocks had already ended the previous week on a negative note, with investors reacting to Trump’s confirmation that he intended to proceed with the tariffs. On Friday, the Dow Jones Industrial Average lost 337.47 points, or 0.8%, while the S&P 500 dropped 0.5% and the Nasdaq Composite slipped 0.3%.

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“While the tariff announcement itself wasn’t surprising, markets had been holding on to a vague hope that Trump might not follow through,” wrote analysts at U.K.-based Matrix Trade in a Sunday report. They pointed out that Trump previously used tariffs as a negotiating tool with Colombia, later withdrawing them once the country met U.S. demands.

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Currency markets also reacted sharply. The Canadian dollar and Mexican peso had shown resilience against the U.S. dollar until late last week when it became clear that the tariffs were moving forward. Analysts at Matrix Trade observed that the U.S. dollar was on the verge of a major breakout against the Canadian dollar, potentially reaching an eight-year high.

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In response to Trump’s trade measures, Canadian Prime Minister Justin Trudeau announced retaliatory tariffs of 25% on U.S. imports. Mexico also warned of countermeasures, while China’s Ministry of Foreign Affairs condemned the move, stating that it would take necessary steps, including filing a complaint with the World Trade Organization.

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The prospect of an escalating trade war is adding pressure on risk assets like equities, primarily due to fears of rising inflation. A prolonged tariff battle could lead to tit-for-tat retaliation, which might force the Federal Reserve to reconsider its rate-cut trajectory.

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Although Trump imposed a relatively lower tariff on Canadian energy imports, crude oil prices still climbed on Sunday night. West Texas Intermediate (WTI) crude for March delivery jumped nearly 2%, reflecting concerns about potential supply disruptions.

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U.S. Gulf Coast refiners, which rely heavily on crude oil imports from Canada and Mexico, are expected to feel the impact of the tariffs. According to the Energy Information Administration, the U.S. imported 4.42 million barrels of oil per day from Canada in 2023, accounting for 52% of total imports. Mexico was the second-largest supplier, providing 910,000 barrels per day, or 11% of U.S. oil imports.

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Michael Kramer of Mott Capital Management noted that the tariffs could push inflation expectations higher, potentially complicating the Fed’s policy decisions. “Two-year inflation swaps could move up if the market fears that trade wars will add to inflationary pressures. A breakout in these swaps would not be favorable for the Fed’s efforts to control inflation,” he wrote.

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However, not all analysts believe tariffs will lead to a surge in inflation. Some argue that while a trade war could disrupt price trends, it may also introduce broader economic uncertainty that weighs on growth prospects. As the situation unfolds, market participants will be closely watching for potential policy shifts and their broader economic impact.

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