Just when you thought his choice of Scott Bessent as Treasury Secretary had tamped down the market's 'tariff tensions', President-Elect Trump reminded everyone who is in charge tonight with drugs and open borders as his main focus.
In a statement on his Truth Social account, Trump swung the hammer against Mexico, Canada...
"As everyone is aware, thousands of people are pouring through Mexico and Canada, bringing Crime and Drugs at levels never seen before.
Right now a Caravan coming from Mexico, composed of thousands of people, seems to be unstoppable in its quest to come through our currently Open Border.
On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States, and its ridiculous Open Borders.
This Tariff will remain in effect until such time as Drugs, in particular Fentanyl, and all Illegal Aliens stop this Invasion of our Country! Both Mexico and Canada have the absolute right and power to easily solve this long simmering problem.
We hereby demand that they use this power, and until such time that they do, it is time for them to pay a very big price!"
...and of course China...
"I have had many talks with China about the massive amounts of drugs, in particular Fentanyl, being sent into the United States - But to no avail.
Representatives of China told me that they would institute their maximum penalty, that of death, for any drug dealers caught doing this but, unfortunately, they never followed through, and drugs are pouring into our Country, mostly through Mexico, at levels never seen before.
Until such time as they stop, we will be charging China an additional 10% Tariff, above any additional Tariffs, on all of their many products coming into the United States of America.
Thank you for your attention to this matter."
As a reminder, Fentanyl, the powerful synthetic opioid, has been linked to around 100,000 deaths annually in the United States, with much of the flow of the deadly drug coming from south of the border.
A damning report released earlier this year by the U.S. House Select Committee on Strategic Competition between the United States and the Chinese Communist Party found that the Chinese regime was facilitating the proliferation of fentanyl in the United States.
Additionally, Trump has previously vowed to end China’s most-favored-nation trading status and impose tariffs in excess of 60 percent on China-made goods.
The initial reaction to Trump's threatening posts was a surge higher in the dollar, erasing the weekend's losses (following Bessent's appointment) with the peso and loonie both tumbling along with the offshore yuan...
Stocks also dropped in Japan, #Australia and SouthKorea, with US futures modestly higher.
Goldman's research team suggests this FX reaction is perhaps a little overdone:
This seems to be more eased vs. what market has generally expected...
...and the less hawkish pick of Treasury head also said to roll out the tariffs in layers (which means the 10% mentioned by Trump just now is indeed a beginning but still more gentle than market expectation).
Their baseline expectation remains (via Hui/Lisheng/Xinquan):
1/ We assume that 20% additional US tariffs on Chinese goods in 2025, expect USDCNY to rise to 7.4/7.5 in 3/6 months, continued RRR/policy rate cuts and augmented fiscal deficit to widen by 1.8pp of GDP in 2025 vs. 2024;
2/ While our 2025 growth forecast (4.5%) is in line with the consensus, our inflation projections are notably below (CPI 0.8%; PPI 0.0%);
3/ We expect exports to be relatively stable, declines in property investment to continue, and consumption (especially goods consumption) to outperform. Growth of government consumption and investment is likely to accelerate.
More specifically, the impact on MSCI China earnings is as follows:
However while they state that this seems softer than expected; the lack of details means the actual impact remains uncertain.
