Investors bought dollars, sold stocks and fretted about inflation on Monday in a scramble to assess the risk of a trade war after Donald Trump put tariffs on top U.S. trading partners.
Trump's orders for additional levies of 25% on imports from Mexico and most goods from Canada, as well as 10% on goods from China are light on detail. But they kick in on Tuesday and have jolted markets that had assumed Trump was mostly bluff and bluster.
The selloff extended beyond just Canadian and Mexican markets and stocks directly in the line of fire, to cryptocurrencies, stocks and even the safe-haven Japanese yen, as investors tried to second-guess the volatile president's next moves.
Worries about the hit to growth from the inflationary impact of the wide-ranging tariffs and the uncertainty that creates for the Federal Reserve played a part, causing everything but the dollar and long-term U.S. Treasuries to be sold.
"Trump's trade war has started," said Alvin Tan, head of Asia currency strategy at RBC Capital Markets in Singapore, noting it was hard to see the U.S. dollar retreating any time soon.
The dollar has been the main mover, gaining as Trump headed for and then won office because investors figured tariff-hit countries would weaken their currencies to offset the impact.
On Monday, the euro fell 1.3% on fears Europe may be next on the tariff list.
Canada's dollar skidded to a 20-year low on the greenback, China's yuan slid in offshore trade , oil jumped, metals slumped and U.S. equity futures dropped about 2% on risks to U.S. companies' bottom lines.
Trump said the tariffs may cause "short term" pain for Americans, and while he would speak on Monday with the leaders of Canada and Mexico, which have announced retaliatory tariffs of their own, he downplayed expectations that they would change his mind.
He said tariffs would "definitely happen" with the European Union, but did not say when.
"Against the backdrop of sweeping tariff threats set to expand even more, the dollar has gained at the expense of currencies of U.S. trade partners," Mizuho analysts wrote.
The longer-run implications for other asset classes is less clear.
Stocks fell as analysts, such as those at Barclays, expect a drag on U.S. company earnings and uncertainty on how the rest of the world responds. Canada has already ordered retaliatory tariffs and Mexico has flagged a retaliatory response.
Mizuho said equity bulls are re-evaluating their Trump trades.
"Equity bulls seduced by 'Trump is good for equities' narrative are subject to a rude wake-up call from the potentially jarring impact on growth/earnings amid retaliatory tariff spirals," Mizuho said.
Shares in Hong Kong (.HSI), Tokyo (.N225), Sydney (.AXJO), Seoul (.KS11) and Taipei (.TWII) made losses around 2%. European stock futures slid 2.8%.
"I don't believe market participants have fully grasped the extent of the potential fallout yet, especially as responses from affected countries unfold," said Tareck Horchani, head of prime brokerage dealing at Maybank Securities in Singapore.
He said many investors had built positions in dollars and gold in recent weeks but may still have been surprised by how quickly Trump's threats turned to action this time around.
"It's possible that some investors underestimated Trump's resolve on tariffs, expecting more negotiation rather than immediate action."
ANXIETY
The difficulty in assessing the effect of tariffs is because their duration and precise rationale remain unknown.
Some investors still believe some sort of deal is possible or that tariffs will be quickly dismantled if Trump gets what he wants.
Trump has linked the tariffs to the flow of migrants and drugs - particularly fentanyl - into the U.S. and demanded crackdowns in Canada, China and Mexico.
China and Mexico have said fentanyl is America's problem, so prospects of a breakthrough are unclear.
China, still closed on Monday for the Lunar New Year holidays, said it would challenge Trump's tariffs at the World Trade Organization and take unspecified countermeasures.
"These generalised tariffs that cover a much wider range of products and are targeted toward social policy have usually proven to be a mistake," said Rick Meckler, partner at Cherry Lane Investments in New Vernon, New Jersey.
"I think that's why the market has looked at this sceptically, and with anxiety, all along," he said. "A full reaction won't be reached until it's clear this is the policy, however."
Debt markets, meanwhile, seem caught between the negative inflationary implications of higher consumer prices and the potential for rate cuts due to the hit to growth - which ought to be positive for bonds.
Benchmark 10-year Treasuries rallied slightly, pushing yields about 4.5 basis points lower to 4.52%.
