Today's markets: A trade war is still the base case

European stock markets opened lower to extend their weekly loss as the threat of an escalating trade war between the US, China and probably the EU remained front and centre. The FTSE 100 slipped 0.3 per cent, with the Dax and Cac seeing slightly more modest declines. Futures tracking the tech-heavy Nasdaq index imply markets will open lower later on, meaning share prices are affecting the US and not just its trading partners.

It was a case of trying to keep up with events yesterday as shares were sold on the tariff news before staging a bit of a comeback, after Mexican president Claudia Sheinbaum said US tariffs have been delayed for a month. Later on Canada also got a one-month stay of execution. It was one of those days where you were probably better off ignoring all the noise. 

But...there is clearly something going. A tit-for-tat trade war is still the base case. Investors are right to be watchful. But so what? What's driving the market is the incredible pricing power and profits of big tech, which is probably not going to change, for now. However, Mexico and Canada are just the test runs for the main course – a full scale trade war with China and the EU. This should worry investors more as this can affect the chipmakers and tech. 

The S&P 500 had been down 1.9 per cent before Sheinbaum’s post on X detailing a good conversation with President Donald Trump and agreement to delay tariffs for a month. The Mexican peso whipsawed on the news, rallying sharply having earlier been down heavily.  

Oil futures that had rallied on the tariffs reversed course from $75 at the highs back to under $72. OPEC+ stuck to its production plan...no concession to pump more yet. No need, yet.

Now it’s the time to react to the reaction – China struck back against the US with a slew of tariffs on American goods and opened an antitrust probe into Google and added fashion house PVH and biotech stock Illumina to its unreliable entity list. China’s tariffs will levy 10-15 per cent taxes on LNG, crude oil, coal and farm equipment. There will be some additional tariffs on some US car exports and controls on rare earth metals. 

The worry now is a full-scale trade war with China and the EU. Trump showed he is willing to back down, i.e. it is a negotiating tactic. But the question is really two-fold – the willingness and the ability of the EU or China to bend to his whims. The EU for instance is not about to water down safety regulations on food to suit US farmers. This is not a drill...

I'm watching the coal miners and the likes of Boeing, Caterpillar, John Deere, Lindsay Corporation and Greenbrier Companies on the China tariffs. Also chipmakers and tech.

The carmakers are worth watching too, Volkswagen makes 43 per cent of its US sales in Mexico, while Nissan is on 27 per cent and Stellantis 23 per cent, according to S&P Global Mobility. Among the Detroit-based automakers, GM is more exposed than peers, with 22 per cent of its US sales produced in Mexico compared with 15 per cent for Ford.

This morning, Diageo is down after cutting its sales guidance on tariff risks and demand dynamics (people are drinking less). Interim results for the six months to the end of December were down 0.6 per cent and organic operating profit was –1.2 per cent. Fefferies reckon that 46.2 per cent of Diageo’s sales in the US were made up of imports from Mexico and Canada. More on that here.

Vodafone (VOD) shares are down 7 per cent from lower third-quarter sales in Germany, its biggest market, although the telco has held on to full-year cash profit guidance thanks to growth in sales elsewhere and lower energy costs.

By Neil Wilson, an analyst at TipRanks