On a recent Monday, a significant decision emerged from the United States government, one that would send ripples through the global economy: all steel and aluminum imports into the U.S. would be subjected to a hefty 25% tariffThe impact was immediate, creating a dramatic shift in foreign exchange rates for resource-rich nations, particularly affecting nations such as Australia and Canada, who have historically been strong allies of the U.S. and whose economies are significantly intertwined with American trade policies.

Australia, renowned as the world’s largest exporter of iron ore, boasts an estimated export revenue of AUD 138 billion in 2024, with iron ore constituting a substantial majority of this revenue—nearly half of the global market shareThe tariffs created an immediate cloud of uncertainty over Australia’s iron ore export future, triggering a plunge in the Australian dollar just moments after the announcement, exposing the market's anxieties about the ramifications this policy would have on Australia’s export-driven economy.

Canada, on the other hand, faced an even sharper impact

Advertisements

With the U.S. being the primary importer of Canadian iron and aluminum, the newly imposed tariffs directly severed vital export channels for Canadian industriesThe economic consequences for Canada are profound, with the Canadian dollar reacting dramatically to the news, reflecting the immediate shock to the economy.

When one reflects upon the history of the U.S. tariff policies, a pattern emerges that could be likened to an intricate martial arts strategy, one that at times baffles the onlookerOften, the government hints at an impending wave of aggressive taxation to ramp up tensions with trading partners, only to later backtrack, either postponing implementation or rescinding it altogetherHowever, the current market atmosphere contrasts sharply with previous years; despite the familiar cyclical nature of the tariff policies, the environment in which they operate has undergone dramatic transformations.

Examining the economic landscape between 2017 and 2025 provides a stark contrast in numerous key indicatorsBack in 2017, the United States was navigating the remnants of a bear market, with the market experiencing a modest uptick of only 8.7% over the next two yearsHowever, by 2025, the market had rebounded spectacularly, demonstrating a staggering increase of 53%, showcasing a newfound vibrancyWhen considering interest rates, the Federal Funds rate exploded from a modest 0.5% - 0.75% in 2017 to the current range of 4.25% - 4.5%. Simultaneously, the yield on 10-year U.STreasuries surged from 2.5% to an impressive 4.48%. This notable spike in interest rates has amplified market volatility, as evidenced by the VIX index soaring from 11 to 16, signaling escalating investor unease.

Such dramatic shifts invite a host of complex risks

Advertisements

While high price-to-earnings ratios and a booming stock market might suggest prosperity, they can also mask impending crisesShould economic growth stall, or if earnings don't meet lofty expectations, future returns could face significant downward pressureAdditionally, the rapid rise in interest rates inevitably elevates borrowing costs for businesses and consumers alikeCompanies may retreat into cautious spending due to the increased cost of capital, while consumers may curtail spending as debt repayment pressures mount, culminating in a negative feedback loop that hampers broader economic growth.

The stock risk premium, a crucial metric for gauging market risk, finds itself in a notably negative state, the most significant in nearly twenty yearsCalculated as the inverse of the price-to-earnings ratio minus the yield on 10-year Treasuries, this low premium suggests an unclear market directionOn one hand, it may signal that corporate profits are poised for a surge; on the other, it could indicate that stock prices are climbing too swiftly, substantially outpacing their intrinsic valueUltimately, this seemingly paradoxical interpretation hinges on the uncertain future of corporate profitability, with lower stock risk premiums suggesting that investors harbor lofty expectations for rapid profit increases.

Nevertheless, reality is presenting a sobering narrativeAs of now, the fourth-quarter earnings reports from U.S. equities reflect a worrisome trendAfter releasing their earnings, both Ford and General Motors witnessed steep declines in share prices, as markets grappled with the potential detrimental effects the new tariff policies would impose on this year's profitability

Advertisements

Advertisements

Advertisements