By Nell Mackenzie and Naomi Rovnick
LONDON (Reuters) – Wall Street opened lower on Monday following a worldwide selloff driven by concern that U.S. President Donald Trump’s tariffs on Canada, Mexico and China are just the opening salvo in a global trade war that would curb economic growth.
The U.S. S&P 500 stock index fell almost 1.5%, while the tech-heavy Nasdaq declined 1.8%. The Russell 2000 index of small cap stocks – viewed as major beneficiaries of Trump’s policies – fell almost 1%.
In three executive orders, the United States imposed 25% tariffs on Mexican and most Canadian imports and a further 10% on goods from China, starting on Tuesday.
Britain’s FTSE 100 fell 1.4%, while the pound dropped 0.3% after Trump told reporters on Sunday that while the country was “out of line” when it came to trade, it may be able to avoid tariffs.
“We’ll see how things work out. It might happen with them, but it will definitely happen with the European Union, I can tell you that,” Trump told reporters after returning to Washington from Mar-a-Lago.
Trump warned Americans might feel “some pain” as tariffs are expected to increase consumer prices in the United States, while the effect of the trade war is expected to be felt far beyond North America.
Traders were already on alert for increased volatility, given that last week marked a milestone utilizing a projection from the S&P 500 index’s 2022 bear-market low.
The Cboe Volatility Index .VIX, known as Wall Street’s “fear gauge”, jumped to its highest level since December 20, but then settled around 18.84.
Overnight moves in derivatives markets suggested that traders were caught off guard by how quickly countries retaliated Trump’s tariff announcements, said Stuart Pyott, institutional trading, at Maven Securities a stocks and rates market maker that sees trading flows in derivatives.
While volatility levels had settled somewhat during European trading, “many investors remain on the sidelines, waiting to see if the [European] afternoon session will bring more clarity,” he added.
Mexican President Claudia Sheinbaum ordered retaliatory tariffs, as did Canada, with Prime Minister Justin Trudeau warning Americans that tariffs would have real consequences for them.
The tit-for-tat moves led to investors buying U.S. dollars, selling stocks and fretting about inflation. The Mexican peso tumbled more than 2% to touch its lowest in nearly three years against the dollar.
In Europe, the pan-European STOXX 600 index was down 1.3% at 1430 GMT, set for its biggest one-day slide this year. The region’s biggest automakers, which are vulnerable to trade duties, sank by more than 3% while the region’s technology shares were also among the major losers, falling over 2%. The euro currency dropped 1%.
‘A LITTLE BIT OF SHOCK’
A model gauging the economic impact of Trump’s tariff plan from EY chief economist Greg Daco suggests it would reduce U.S. economic growth by 1.5 percentage points this year, throw Canada and Mexico into recession and usher in “stagflation” at home.
“People thought, okay, there’s a pro-business president, there’s a pro-business Congress. What could go wrong, right? And I think it’s just a little bit of a shock that he’s trying to do so many things at once,” said Olivier D’Assier, head of applied research for Asia Pacific at investment consultant Simcorp.
“He’s picking so many fights, and the fights that he’s picking first don’t seem to be the most pressing ones.”
Barclays strategists previously estimated tariffs could create a 2.8% drag on S&P 500 company earnings, including the projected fallout from retaliatory measures.
U.S. two-year Treasury yields steadied at 4.247%, a 10-day high, on concerns tariffs will stoke inflation and delay Federal Reserve interest rate cuts.
Bitcoin tumbled as low as $91,439.89, a three-week trough, while ether, the second-largest cryptocurrency by market value, fell 20% over the weekend and into Monday.
Oil prices rose, with U.S. Texas Intermediate crude up $1.31 at $73.82 a barrel and Brent crude futures up 80 cents at $76.46 a barrel as investors tried to gauge the impact of the tariffs on world energy.
A meeting of ministers of oil producer group OPEC+ on Monday has adjusted the list of secondary sources it uses to monitor members’ output, deciding to remove the U.S. government’s Energy Information Administration.
(Reporting by Nell Mackenzie, Editing by Amanda Cooper and Angus MacSwan)
