Trading Trump tariffs: stocks and markets to watch

US-China tariff tensions and market reactions

United States (US) President Donald Trump is imposing a 25% tariff on all goods coming from immediate neighbours Canada and Mexico until the countries crack down on drug trafficking and illegal migration into the US. The Trump administration is also placing a 10% tariff on goods from China until it reduces fentanyl smuggling.

Trump has consistently advised he would use tariffs to grow the US economy, protect jobs, and raise revenue. These tariffs may already be priced into the markets, though many analysts thought the plan was a bluff.

Understanding tariffs

It is worth explaining how tariffs work. A tariff is a domestic tax levied on goods entering a country.

For example, if a $100,000 car is imported into the US with a 25% tariff, the domestic US-based company importing the car would be liable for a $25,000 fee.

Trump tariffs implications

Increased US tariffs could significantly impact the global economy. In 2023, the US imported $3.1 trillion of external goods, amounting to 11% of its gross domestic product (GDP). Crude petroleum and cars are the top imports, with many coming from Canada and Mexico.

The US currently generates about 2% ($80 billion) of its total tax revenue from tariffs, but the economic burden tends to fall on US consumers through higher prices or on US companies through lower profits.

Most of the burden is borne through consumer price increases. Think tanks estimate the new Trump tariffs could reduce middle-class incomes by between $1700 and $3900 per year, while increasing inflation.

Economic and political ramifications of tariffs

Some economists argue that tariffs encourage domestic manufacturing and enhance national security. However, the 2018 steel tariffs did not increase steel jobs, with employment in the sector below pre-tariff levels, and downstream industries reliant on steel have been hit hard.

Despite initial tariffs, the US trade deficit increased from $480 billion in 2016 to around $653 billion by the end of Trump's first term in 2020, partly due to a stronger US dollar making exports less competitive.

While Trump is intensifying tariffs in his second term, the former Biden administration maintained many of Trump's tariffs and even introduced new ones, including on electric vehicles (EVs) from China.

Key markets to monitor amid tariff changes

Here are some of the best markets to watch as Trump imposes increased tariffs:

VIX

Unless the effect of tariffs has been priced in, significant volatility may occur as the world digests Trump’s new tariffs. The Chicago Board Options Exchange (CBOE) volatility index (VIX) measures the market's expectations for volatility over the next 30 days, serving as the first port of call for traders in times of uncertainty.

The VIX is even referred to as the ‘fear gauge’ as it is usually a decent barometer of investor sentiment. Derived from the implied volatility of near-term S&P 500 index options, the VIX tends to rise when stocks fall, making it a popular hedging choice.

USD/CAD

Tariffs are likely to increase the strength of the US dollar, but their impact on major currencies, including the euro, pound sterling, and the Australian dollar, might disrupt global trade. The US dollar/Canadian dollar (USD/CAD) pair is interesting as Canada responds with 25% tariffs on C$155 billion of US goods.

Canada is also considering specific tariffs on key goods produced in strong Republican states, adding a new political dimension to foreign exchange (forex) trading.

Gold

Gold remains a popular inflation hedge, trading at a record high due to central bank buying. If tariffs drive inflation higher, gold demand may rise. Tariffs could also weaken the US dollar over time, making gold more attractive as a safe haven.

Conversely, if the US economy strengthens, gold may become less attractive than US dollar-denominated bonds.

Nasdaq 100 futures

Nasdaq 100 futures opened down 600 points, exposed to weakening sentiment given the high valuations of the tech stocks dominating the index. Eventhough the Dow Jones and S&P 500 also opened down on Sunday night, the Nasdaq 100 took the largest loss.

Earnings season will add volatility, with Alphabet and Amazon due to report. China's tariffs could worsen the market mood, impacting the semiconductor and tech component sectors.

iShares Semiconductor ETF

Many US-based semiconductor companies - including iShares MSCI Global Semiconductors UCITS ETF constituents Nvidia, Advanced Micro Devices (AMD), Intel, and Qualcomm - rely heavily on China for both manufacturing and sales. Tariffs on tech components could increase costs, disrupt supply chains, and impact revenue. Taiwan Semiconductor Manufacturing Company (TSMC) might find itself in a particularly difficult position.

Tariffs will likely cause volatility in the semiconductor/artificial intelligence space, but long-term investors might see opportunities in accelerated domestic production and increased US-based artificial intelligence (AI) investments.

Tesla

With Tesla Chief Executive Officer (CEO) Elon Musk championing Trump through his election campaign and running the new ‘Department of Government Efficiency,’ Tesla may be in for some turbulent times. The electric vehicle (EV) trailblazer could be hit hard by tariffs on auto parts imports, and beyond this, over the weekend former Canadian Finance Minister Chrystia Freeland suggested that the country could ‘impose a 100 per cent tariff on all Tesla vehicles.’

Given Tesla’s arguably weak quarterly results in January, any tariffs specifically aimed at the company in an effort to target Musk could prove highly damaging.

Trump Media & Technology Group

Trump’s 'Trump Media & Technology Group’ social media app remains loss-making, , but the global impact of the tariffs could lead to meme-levels of trading activity this week. Traders bought up the stock before the election, but it has since sold off. This stock could become a top name on social media platforms like Twitter and Reddit.

Be warned though that meme trading activity can be both very high risk and very unpredictable, with very few or even no fundamentals attached to price movements.

Alibaba

Alibaba, China’s answer to Amazon, could face significant challenges from increased tariffs. The new 10% tariff could eliminate the exemption for packages valued at under $800, which allows companies like Alibaba to ship goods directly to US consumers without incurring duties. The company may be doubly affected if Chinese tariff reactions impact the other side of its business.

Alibaba’s recent launch of a new chatbot, that outpaces DeepSeek, complicates its investment landscape further.

Mining sector

This trade war is nothing new. The US has been attempting to prevent China from accessing its most advanced semiconductors to maintain an edge in the AI arms race. China has responded by imposing export controls on various critical and defence minerals, including rare earths, antimony, and tungsten.

While tariffs may damage the global economy and cause major companies like Rio Tinto and Glencore to struggle, ex-China sources of critical minerals could become more desirable if China escalates, leading to substantial grant funding for US projects to reduce dependency on China.

Oil & gas

Trump promised to get inflation down with a 'Drill, Baby Drill' strategy. If Canadian imports become significantly more expensive, crude oil prices may rise in the short term, though Trump plans to allow more oil and ​natural gas drilling on federal lands to increase US oil production by an additional three million barrels per day.

While the US is the largest individual oil producer, the Organisation of the Petroleum Exporting Countries (OPEC) controls the majority. Any signs from OPEC will be closely watched, especially if it appears the global economy and oil prices start to fall.