This is and email sent to my clients on the morning of Monday Feb 3rd
Good Morning.
The Tariff war that is about to come into effect tomorrow will be top of mind for most of you.
I’ve put together some points below and included and RBC Economics article which sums up our views on the impacts.
I’ve spoken to many clients over the past few weeks regarding how we should prepare for this in the portfolio. As I wrote back in November, the key is to expect volatility and not try to guess what is going to happen. The One thing we do believe is that we will get through this. The stock market will recover, as it always has. Stick to your strategy- your asset mix- and rebalance the portfolio through the volatility. Doing that will ensure you come out ahead at the end. Definitely do not try and “get ahead” of what you think is happening and sell out of certain sectors or companies and sit on the sidelines until the dust settles. Doing that creates a situation of timing the market which seems easy in theory but is proven to be next to impossible. In fact, what your gut is telling you to do is most likely the wrong thing.
To repeat myself, if you instead focus on the one thing we are most confident in- that the market will recover, rebalancing the portfolio through the volatility removes emotion and will ensure you come out ahead.
The U.S. is set to levy 25% tariffs on imports from Canada and Mexico (10% on Canadian energy) and 10% on China, with the Canadian tariffs taking effect on February 4th. The Canadian government will partially retaliate, starting with 25% tariffs on C$30B of imports from the U.S.
Markets were not priced for Trump to follow through on his threats to this degree. USD/CAD jumped to a 22-year high (currently around 1.468), and the UST curve is bear flattening (2Y yield +7 bps). Canadian yields are 10+ bps lower across the curve.
Analysts suggest sustained tariffs (~6+ months) of this magnitude will push Canada’s economy into a recession; cumulative negative impacts of 3.5-4.5 ppts of GDP generally don’t assume any policy response.
The BoC might not be swift to respond (RBCCM sees low odds of an inter-meeting cut or >50 bps in March, though another 25-50 bp cut in March looks quite likely) as it evaluates the economic and inflation impact and fiscal response, but the terminal overnight rate is ultimately likely to be lower than in a no-tariff base case
