Global equity markets fell more sharply this week following the revelation from the U.S. administration that its reciprocal tariffs will be much broader and larger than most investors expected. The “Liberation Day” announcement raised the spectre of a more global trade war between the U.S. and many, if not all, of its trading partners. Today, we discuss recent trade developments, its implications on the economic outlook, and the response across equity, fixed income, and currency markets.

Tariffs have now gone global. In the past few days, the U.S. unveiled a 10% baseline tariff on all imports, plus much higher individual duties to be applied on close to sixty countries. The average U.S. tariff rate is now estimated to be just above 23%, up significantly from the 2% level from the beginning of the year. In a somewhat positive surprise, Canada and Mexico were spared, as neither country will face additional levies.

The market reaction to the tariff developments was predictable in some cases, and surprising in others. The U.S. stock market bore the brunt of the weakness, continuing a trend that’s been in place this year. Technology and industrial sectors were particularly weak as investors are increasingly questioning the resilience of the U.S. economy and the growth expectations embedded in its stock market. The Canadian market fared a bit better, with bank stocks demonstrating some resilience, helping to offset some of the weakness from the Energy sector. Overseas equity markets were also lower, albeit to a lesser degree.

Not surprisingly, government bond yields moved lower as investors have grown concerned about global growth and have sought safe-haven assets. The move in U.S. bond yields was noticeably more pronounced than in Canada. The bigger surprise may have been in the currency markets with the Canadian dollar, Euro, and Japanese Yen, among others, rising meaningfully following the tariff announcement.

The high level of uncertainty in recent months caused by the threat of tariffs may have already resulted in some economic impact in the form of slower spending, investment, and activity. But the tariff announcement over the past week represents a new possible shock to the global economy that could result in higher prices across a range of products, lower spending, and shifting supply chains as businesses and consumers look for substitutes where possible. And while a recession is by no means a foregone conclusion, the risk of one occurring has risen. Central banks like the U.S. Federal Reserve are unlikely to stand pat should economic trends deteriorate but lowering rates in the face of rising prices may be somewhat uncomfortable for them.

We continue to manage portfolios in this environment with a degree of caution, ensuring our equity exposures have been rebalanced and do not exceed the targets laid out in the investment policies and financial plans that we have designed for our clients. Those plans assume that market drawdowns, such as the one we are living through, may occur from time to time. Sticking to a plan ensures that we remain disciplined in our approach which is particularly important during periods of market duress where emotions can often get in the way.

Thanks for tuning in and see you in two weeks.