Wall Street’s bet that stock market will temper Trump pays off

Wall Street endured a bit of whiplash Monday, with stocks slumping in early trading after the Trump administration moved to impose sweeping tariffs on the nation’s three largest trading partners, only to come roaring back when Mexico’s president announced a pause in the levies.

Over the weekend, President Donald Trump imposed tariffs on imports from Canada, Mexico and China. The move elicited a swift response from Canada, which retaliated by targeting hundreds of U.S. imports from oranges to motorcycles. Investors had been expecting Mexico to follow suit Monday morning, sparking a global sell-off that sent the Dow Jones Industrial Average tumbling 600 points by midmorning and pushed the broader S&P 500 and tech-heavy Nasdaq deep into negative territory.

But all three indexes pared their losses after Mexico announced that the two nations had reached an agreement on border security and trade to delay the tariffs. By the time the regular trading day ended, the Dow had shed nearly 123 points, or 0.3%, to close at 44,421.91. The S&P 500 lost 0.8% to close at 5,994.57 while the Nasdaq fell 1.2%, settling at 19,391.96.

Analysts said the early market jitters reflected uncertainty about disruption of long-established trade relationships and what the new import duties might mean for inflation. Trump targeted Canada and Mexico with a 25% tariff on goods. For China – which already is subject to a 25% tax on many of its products – he tacked on a 10% levy.

Although tariffs are meant to protect U.S. companies from global competition, they also could disrupt global supply chains and increase costs for businesses and consumers alike. The Budget Lab at Yale University estimates the typical U.S. household will lose $1,200 in purchasing power because of the levies.

“Volatile messaging by the administration will lead to volatile markets,” said Michael Farr of the D.C.-based investment firm Farr, Miller and Washington. “This is a process of markets becoming accustomed to Donald Trump 2.0 … there will likely be a point, after several nauseating peaks and valleys, that the markets gets used to this.”

Wall Street was apparently reassured after Mexican President Claudia Sheinbaum said Monday that the White House agreed to pause tariffs for one month after the two nations reached an agreement on several issues. She also said she would dispatch 10,000 members of Mexico’s national guard to provide security at the border. (Canadian Prime Minister Justin Trudeau announced a similar delay on social media after the markets closed.)

The market rebound could suggest that investors largely viewed the tariff threats against Mexico and Canada as a negotiation tactic rather than a change in trade policy, said Ross Mayfield, investment strategist at Baird. “I think the market was caught somewhat off guard by the speed of the decision, but this has been somewhat priced in to tariff sensitive stocks and currency markets for months.”

Still, the morning’s rout buffeted stocks in some sectors the president has sought to revitalize. Home builders saw their stock prices suffer as investors grappled with higher costs on Canadian lumber. Automakers were jolted, too, with General Motors closing down 3.2%, while Ford and Stellantis lost 1.7% and 3.9%, respectively. Leading electric vehicle makers also suffered, with Tesla and Rivian off 5.2% and 1.4% respectively. Honda and Nissan lost 5.1% and 3.2% respectively. Volkswagen fell 4.1%.

The CBOE volatility index, known as Wall Street’s fear gauge, was up 20% Monday morning, although it settled throughout the day and remains far lower than recent highs. Investors flocked to “safe haven” assets such as gold and government bonds, while cryptocurrencies lost value.

The moves roiled global markets, with Asian and European stocks suffering losses and the dollar gaining value.

In Asia, Taiwan’s Taiex dropped by 3.5%, Japan’s Nikkei index lost 2.7%, and South Korea’s Kopsi declined 2.5%. Hong Kong’s Hang Seng Index was down 0.3%; markets in mainland China remained closed Monday.

European stocks also retreated Monday: London’s FTSE 100 fell 1%, and the European Stoxx 600 dropped 0.9%. France’s CAC 40 shed 1.2%, and Germany’s DAX erased 1.5%. Car manufacturers, tech companies and financial services firms were hit particularly hard. Trump told reporters late Sunday that he “definitely” planned to impose tariffs on imports from the European Union “soon.”

European leaders pledged Monday to hit back against potential tariffs while warning that a trade war would hurt both sides. “We were listening carefully to those words, and of course we are preparing also on our side,” E.U. foreign policy chief Kaja Kallas said.

“If we were attacked on trade issues, Europe, as a power that stands its ground, will have to make itself respected and therefore react,” French President Emmanuel Macron told reporters in Brussels.

Others focused on the need to negotiate with Trump to avoid a spiraling trade war. “I’m not going to start a war. I want to start negotiations,” said Finnish Prime Minister Petteri Orpo.

Lithuanian President Gitanas Nauseda said Europe should engage in a “positive economic agenda” with the United States instead of “fighting with each other.” He buying more weapons and liquefied natural gas from the United States. “We have to propose something that could be interesting and attractive for the United States like free trade agreements in the automotive industry, like buying more energy resources,” he said.

Polish Prime Minister Donald Tusk said it would be “a cruel paradox” at a time of “direct Russian threat and Chinese expansion” to find reasons for conflict among allies. “I think that we have to do everything to avoid this totally unnecessary and stupid tariff war or trade war,” he told reporters. “During our possible talks with the American friends, I think we cannot lose common sense, awareness of our interests, but at the same time, we cannot lose our European self-respect.

The U.S. dollar climbed in offshore trading in comparison to the Chinese yuan, while the Mexican peso and Canadian dollar both tumbled, with the Canadian currency reaching levels not seen since 2003, according to Reuters.

Mayfield, the Baird investment analyst, said the uncertainty around tariff policy could weigh on markets for some time, possibly outweighing the pro-business policies such as lower taxes and deregulation. Although tariffs could effect positive change, a broader trade war with allies is “a net negative” for markets, he said.

“Corporate decision-makers want to know the rules of the game they are playing – this is why stocks rallied after a clear election result – but the tariff uncertainty muddies those rules,” Mayfield said.