Wall Street Reacts to Trump’s Tariff Talk

(Bloomberg) — Traders got a stark reminder of President-elect Donald Trump’s fly-by-night approach to economic policy Monday night, when he blasted off threats to use steep tariffs against America‘s three biggest trading partners to stop the flow of drugs and migrants into the US.

Most Read from Bloomberg

The 6:35 p.m. social media posts jolted traders from their commutes or early dinners, forcing them into an effort to assess the market impact.

Yes, the dollar surged against the Mexican peso and Canadian dollar, and Treasury yields edged higher. And US stock futures, barely positive after another solid day of gains, slipped some.

But for so large a risk to global trade, the market reaction was muted and brief. By 10 a.m. in New York, the S&P 500 Index rose 0.2% and small caps in the Russell 2000 — thought to be winners under a widespread trade war — fell 0.7%.

Wall Street strategists had a quick explanation. It’s just “round one in a long process,” said JonesTrading’s Dave Lutz. “These threats are viewed as warning shots,” said his colleague Mike O’Rourke. Or as Charlie McElligott of Nomura put it: “zzzzzzz.”

Shares of General Motors Corp. and Ford Motor Co. fell about 7% and 2%, respectively, due to their exposure to Mexico and China through the automotive supply chain, and an exchange-traded fund filled with Mexican companies slipped. Yet the so-called Wall Street fear gauge, the Chicago Board Options Exchange Volatility Index, retreated slightly and hovered near levels that indicate extreme calm.

Here’s what Wall Street pros were saying about the muted reaction in equities:

Dave Lutz, equity sales trader and macro strategist at JonesTrading:

“It feels like stocks are discounting a lot of the news, thinking that this is round one in a long process before tariffs are ultimately implemented. And that once implemented, they will probably not be as harsh as this.”

Dennis Debusschere, founder and chief market strategist at 22V Research:

“It’s being viewed as a negotiating tool for now, by linking it to immigration and drugs. That might not be true longer term, but that is how people are thinking about it now.“

Charlie McElligott, cross asset macro strategist at Nomura

“This has always been the ‘Art of The Deal’ playbook since Trump 1.0, start high and hard with negotiating leverage and intent… and go from there, which is frankly exactly what Scott Bessent told us over a month ago before the Election—hence, zzzzzzz.”

Mike O’Rourke, chief market strategist at JonesTrading:

“These threats are viewed as warning shots to get China, Mexico and Canada to meet expected responsibilities. In the case of Canada and Mexico, it is not too much to ask that they tighten control of the border to prevent illegal crossings. In the case of China, it is failing to meet the responsibilities regarding fentanyl from the agreements made in during the first Trump Administrations. The currency moves are discounting potential risk to Canada and Mexico if they fail execute on their responsibilities. US Investors realize this is not a big ask by Trump. He is willing to use tariffs to prompt China, Mexico and Canada to take actions they have already agreed to.”

Kevin Gordon, Senior Investment Strategist, Charles Schwab & Co.:

“I think it’s mostly due to the fact that the threats are just threats right now. We have to wait to see what meat will actually be put on the bones after Trump takes office — not to mention the fact that on the other side of the coin is immigration policy. I think it’s plausible to expect him to stick to his word on these proposals, but it will be difficult for the market to price in anything right now, given the uncertain nature of the details and sequencing of these policies.”

Joseph Saluzzi, co-head of equity trading at Themis Trading LLC:

“The market may view this more as a temporary move since there are strings attached to the move. In other words, maybe the tariffs on Mexico and Canada will only be a short term thing. Also, market has the momentum and it’s a short week, so sometimes it’s tough to break that.”

David Lin, founder & CEO at Linvest21:

“Markets have become adept at tuning out political noise, particularly tariff threats that lack immediate action or detailed implementation plans. Instead, investors remain focused on economic fundamentals and corporate earnings. Moreover, President Trump’s Treasury Secretary pick, Bessent, has played a calming role. His early comments on a staged implementation of tariffs and his reputation as a steady hand have reassured markets, helping to mitigate volatility and maintain stability.”

–With assistance from Natalia Kniazhevich, Alexandra Semenova and Elena Popina.

(Updates index moves in fourth paragraph, updates chart.)

Most Read from Bloomberg Businessweek

©2024 Bloomberg L.P.