US stock markets set for a losing start to the week as trade war begin Inbox

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US stock index futures are down significantly in early pre-opening trading. The S&P 500 E-mini futures are down more than 1.5%.

The losses for US stocks come as tariffs on imports from China, Canada and Mexico are set to go into effect this week.

These losses also reflect investors’ concerns about the potential impact of these tariffs on the US economy. Donald Trump began to acknowledge this in a tweet yesterday when he said that the US could face some pain due to the tariffs.

This “pain” could take many forms, including a potential rise in prices in the US, which will ultimately affect consumers, in addition to the fact that these tariffs will lead to retaliatory measures from these three countries – and those who will follow them – through the imposition of counter-tariffs and restrictions on goods exported from the US. While agricultural products, alcohol and American cars appear to be among the most prominent targets of these retaliatory measures that have already been threatened, according to The New York Times.

The Times also quoted experts as saying that the pain resulting from the escalation of the trade war will be represented by slowing economic growth, rising prices and crippling American industries, in addition to making China a more powerful global trading centre.

While rising concerns about inflation are likely to keep the Federal Reserve more cautious about the pace of interest rate cuts this year. Even before the trade war, inflation was accelerating and markets no longer expected a rate cut before next June. While increasing concerns about rates remaining high for a long time may exacerbate the negative factors pressuring the stock market to decline.

In contrast to these concerns, the crystallization of the negative impact on the US economy as a result of this trade war may be a deterrent factor for Trump to reduce the escalation. Trump also like to watch the stock market rally, as we have seen from his speeches and tweets, especially in his first term, and he sees that as an indicator of the health of the US economy, but seeing it continuously decline may make him reconsider his decisions. He did that when he withdrew the decision to suspend federal grants, which caused widespread chaos in the US domestically. While I think that the recurrence of this chaos with any potential disruption to supply chains would reinforce the hypothesis of a repeat of the scenario of the decision to suspend grants.

In addition, the potential disruption resulting from this trade war may make all parties more committed to negotiating trade terms to avoid the pain.

China, in turn, is set to present its bid to the US administration to de-escalate. According to The Wall Street Journal, it will take a series of measures to de-escalate the trade, including trying to revive a failed agreement on China’s commitment to import $200 billion of American goods over two years, in addition to pledging to expand investment in the electric car battery industry, not devaluing the yuan, and tightening restrictions on fentanyl exports.

Therefore, if this scenario comes true and the trade war de-escalates or continues and we see signs of the economy and companies’ ability to adapt, it might give comfort to US stocks and revive the bull trend again. Major companies have already shown resilience in the face of extended monetary tightening since 2022, and the trade war will be a second test.