Markets have experienced significant volatility in recent sessions, driven by tariff-related headlines. As tariffs continue to be used as a negotiating tool, uncertainty around trade policy remains high. In North America, this uncertainty is expected to persist until a new United States-Mexico-Canada Agreement (USMCA) is finalized. Until then, the threat of tariffs will remain a key risk factor.

Three Key Takeaways for Markets

Several important insights emerge from recent developments:

1. The U.S. Administration is Transactional

Nothing is final until an agreement is officially signed. The U.S. government’s approach to trade and economic policy remains fluid, with negotiations subject to sudden changes. Policy shifts should not be assumed to be permanent until they are fully enacted.

2. U.S. Economic Policy Threats Must Be Taken Seriously

Policy threats should be viewed as real risks. The administration has demonstrated a willingness to follow through on its statements, making it essential to consider potential economic impacts rather than dismissing rhetoric as posturing.

3. The U.S. Policy “Put” May Be Deeper Out of the Money Than Expected

There is a perception that equity markets serve as an important indicator for policymakers and that any significant decline could prompt a reversal of policy decisions. However, the willingness to tolerate market downturns may be greater than expected, meaning that policy interventions may not occur as quickly as some anticipate.

Investment Implications

Given the current environment, positioning across key asset classes should consider the following:

• U.S. Rates: Adding duration may be beneficial if rate increases fully price out cuts or introduce the risk of hikes.
• Canadian Rates: Tariff imposition could lead to a Bank of Canada rate cut below 2%, driving a rally in front-end CAD rates.
• U.S. Dollar (USD): Strength is expected in the near term, with potential softening in the second half of 2025.
• Canadian Dollar (CAD): USDCAD volatility may be lower relative to spot CAD movement.
• U.S. Equities: A focus on individual stock selection rather than broad market exposure may be prudent. Earnings could decline by as much as 8% under bilateral tariff scenarios, assuming no pass-through to consumer prices.

With trade policy uncertainty likely to persist, markets will remain sensitive to tariff-related developments. A cautious and flexible approach is necessary to navigate potential disruptions. While risks are elevated, strategic positioning can help manage volatility and identify opportunities in this shifting landscape.