NEW YORK/LONDON (Reuters)
Global markets are set for a fresh jolt on Monday after US President Donald Trump launched a trade war with sweeping tariffs on Canada, Mexico and China that threaten to undermine economic growth and reignite inflation.
Markets were dealt a blow last week as the emergence of China's DeepSeek AI model hit tech stocks, and uncertainty around Trump tariffs has weighed on broader markets.
The risk of a global trade war could hurt US corporate profits and pressure inflation, potentially upending US interest rate cut expectations, and further weaken currencies such as the Canadian dollar and China's yuan.
"I do think the markets are going to react to this," said Mark Malek, chief investment officer at Siebert Financial in New York. "Until now the market has really been on Trump's side, but that could change and the market could challenge him for the first time."
In three executive orders, Trump imposed 25% tariffs on Mexican and most Canadian imports and 10% on goods from China, starting on Tuesday.
Canada said it would respond with 25% tariffs against $155 billion of US goods, beginning with $30 billion taking effect Tuesday and $125 billion 21 days later.
Canada's dollar has been in the firing line in recent days, hitting five-year lows around 1.459 per dollar last week .
Mexico's peso would suffer a near-12% fall if the US hits the country with 25% trade tariffs, JPMorgan estimated in a note published on Friday. The Mexican peso was trading at around 20.6 per dollar late Friday.
Analysts also expect some kind of selloff in stocks and other higher-risk assets when markets reopen on Monday.
With the S&P 500 near all-time highs, the index could move 3% to 5% in either direction in the short term, Evercore ISI strategists said in a note.
The executive order includes a provision for Trump to increase the size and scope of the tariffs if countries affected seek to retaliate.
The Fed last week paused its rate-cutting cycle, while Fed Chair Jerome Powell said officials were "waiting to see what policies are enacted" with the new president.
European Central Bank policymaker Klaas Knot said on Sunday he expects new tariffs will lead to higher inflation and interest rates in the US that will likely weaken the euro.
Europe also faces the risk of US tariffs.