Markets brace for renewed volatility on trade war escalation. What’s next?

The trade war begins

Just as the dust around DeepSeek begins to settle, US President Donald Trump’s follow-through on tariffs is set to stir fresh market turbulence in the new week. No doubt market participants had already been forewarned about tariffs on Mexico, Canada, and China, but the full implementation seems to dash any hopes for a more gradual rollout or potential delays. Over the weekend, President Donald Trump announced a 25% tariff on imports from Mexico and Canada (10% on Canadian energy) and an additional 10% tariff on China.

The pace of escalation could catch markets off guard as well, with market participants quickly pricing in higher global growth risks into the new week. Canada has hit back with a 25% tariff on US almost immediately. A retaliatory response is also expected from Mexico and China and while concrete details are less clear at the current point in time, it raises the prospects of a prolonged tit-for-tat trade war. With the US vowing to counter any retaliatory measures, the standoff echoes the 2018 trade war, where tensions are likely to worsen before any signs of resolution emerged.

What’s next?

The implications for trade restrictions could result in reduced global trade flows, supply chain shifts which could mean higher costs for businesses, and higher inflation. The uncertainty over how long trade tensions may persist—along with the possibility that additional economies, such as the EU, could be targeted by US tariffs—may trigger a wave of de-risking across global equities.

Thus far, the trade dynamics and economic asymmetry could leave US with the upper hand, with Mexico and Canada facing heightened recession risks in any prolonged trade war. However, history offers a cautionary note for US equities as well—during the 2018 trade war, the US markets entered correction territory, though part of the downturn was also driven by the Federal Reserve (Fed)’s tightening cycle.

Eyes will be on a series of US economic data this week, such as the Purchasing Managers' Index (PMI) figures and the US non-farm payrolls. Signs of economic resilience may cushion any US equities fallout, with stronger data suggesting that the US economy is in a good standing to weather the effect of any counter-tariffs.

Nasdaq back to retest key channel trendline support

The initial market reaction to US tariffs saw the Nasdaq heading straight to retest a key channel trendline support at around the 20,981 level. Holding above the trendline support may be key, with any move below 27 Jan low (previous bearish reaction to DeepSeek) at the 20,630 level likely to serve as a bearish cue, which could pave the way for a deeper retracement towards the 19,875 level next.

Nasdaq 100 daily chart

FX

With the prospects for further tit-for-tat measures to come, sentiments around risk currencies will likely be negatively impacted for longer, particularly around USD/CAD, USD/MXN, and USD/CNH, alongside AUD/USD, and other emerging market currencies which are sensitive to global trade dynamics. On the other hand, the Japanese yen may hold up on safe-haven flows and Japan not being under US crosshair, at least for now.

We expect continued US dollar strength, as tariffs may bring upside risks for US inflation, which should delay the Fed's easing process and keep US policymakers on more hawkish rhetoric. Heightened growth risks in other economies could lead to a wider policy divergence with the US, which could support flows for the US dollar. The year-to-date high at the 109.81 level is now in focus, with the broader upward trend leaning on the upside. A move above the 109.81 level may leave the 111.30 level on watch next.

US dollar daily chart

Gold

Gold should remain as an attractive hedge against geopolitical tensions. While prices are edging slightly lower this morning, potentially due to some 'sell-the-news' reactions and pressures from a stronger US dollar, any dip may be short-lived as trade escalation could likely trigger renewed traction.

A broad rising channel is in place, with near-term support around the $2721 level. The medium-term price target remains at the key psychological $3000 level

Gold daily chart

Asia open

The Asian session seems set for a negative open, with Japan's Nikkei -2.8%, ASX -1.9% and KOSPI -2.3% at the time of writing. Perhaps one to watch may be any resilience in Chinese equities, given that the 10% tariff seems to be a step down from the initial 60% promised in Trump's campaign. This may explain the more measured response from China in addressing the recent US tariff for now, turning to file legal proceedings with the World Trade Organization (WTO) and refraining from threatening any counter-tariffs to avoid any further trade responses from the US.

For the Hang Seng Index (HSI), the previous two interactions with the daily Relative Strength Index (RSI) at its midline have been met with some support, which leaves eyes on whether the index can hold up this time around as well with a near-term higher low. Resistance ahead may be at the recent high at the 20,671 level.

Hang Seng Index (HSI) daily chart