The themes that keep on giving – Nationalism

We will keep on returning to the thematics of 2025 every single time they appear. Already two out of the five themes for this year have been the biggest movers of markets, and we expect this thing to continue throughout.

Make no mistake, as in indices and FX traders, we’re going to have to accept that volatility is going to grow from this point, something that we should embrace. Clearly Washington and Beijing are going to be the main impactors geopolitically, While the US dollar, crude and gold will be the markets most likely to see movement that will attract us as traders.

Which brings me to thematic 1 of 2025 nationalism. It is going to be the theme that keeps on giving this year, because clearly the president sees tariffs and the nationalisation of the US economy as the future of US growth and economic management.

We have waited to comment over what might transpire in markets around tariffs but is it now being official and with the US over the weekend announced that tariffs on imports from Canada, Mexico, and China will take effect on Tuesday, February 4, only for this to be held off for 30 days for Mexico and Canada due to ‘constructive changes from sovereign nations’.

We need to highlight something every telling in what was originally proposed in the tariffs. “Imports from Mexico and Canada (excluding energy products) will face a 25% tariff, while Canadian energy products and all imports from China will be subject to a 10% tariff.”

We can’t highlight enough how much crude is going to be a pawn in all trade war mongering going forward. The fact that the administration excluded Canadian energy products from the 25% tariff does show that the President is aware that adversely impacting one of the biggest consumption products in the US will be highly detrimental to POTUS personal standing. It is something the administration is aware of and will do whatever it can to mitigate a core product increasing in price.

However this also shows its hand – the retaliation from China is a 10% tariffs on US LNG coal and crude products. This hits the US where it hurts most, most will forget the US is the largest exporter of oil on the planet. It just gets blurred when we look at OPEC as a whole and the fact that this cartel produces 21 to 23% of the world’s global oil supplies.

China doesn’t have to play by the same rules as the US. It can get around its tariffs by going to nations such as Venezuela, something most in the West can’t do. Leaving the US with less trade revenue, a core product that appears more expensive to Chinese consumers that will inevitably look to other options and the dream of using tariffs to fund personal income tax cuts in tatters.

But it’s more than that too, in the words of the late great Milton Friedman: ‘tariffs are tax on the consumer not on the sovereign.” The upside risks to inflation in the coming months are growing by the day.  The Fed has signed as much and now so has the market.

Which brings us to gold, the astronomical rise that we have seen in the price of gold over the last three to four weeks shows very clearly the inflation risk markets now see. The question we keep getting is how high can gold actually go? And add to this the chart shows that gold has actually broken through most resistance levels and is now trading in uncharted levels and making new highs daily. 

It’s not hard to see why, should tariffs on Canada and Mexico persist beyond a week or two, food and energy prices in headline inflation data could be affected relatively quickly. Indicators like daily retail gas prices and weekly food prices may provide early signals of the impact on headline CPI for February. Next Monday’s inflation report may actually be the first reading to show the effects of proposed tariffs and explain almost exclusively the capital that is flowing into gold.

For those out there looking to estimate how much tariffs would impact US CPI. Here is a previous estimate from the market around a 25% tariff on Canadian oil. A 25% tariff could push headline CPI up by  approximately 0.2 percentage points alone with the broader tariffs pushing the upper-bound estimate by as much as 0.8 percentage points.

 Approximately 10% of all US consumer spending involves imported goods, either directly or indirectly. With 25% of total imports facing a 25% tariff and  approximately 17% subject to a 10% tariff, the potential inflationary impact is notable. 

Add to this the indirect effects we have already seen such as retaliatory tariffs or further trade tensions, add uncertainty. These could and will push inflation expectations higher, posing a greater inflationary risk. Secondly, prolonged tariffs might also slow growth and employment – something indices traders will be very very aware of and considering the valuation of the S&P 500 and the like this is a concern.

In short semantic 1 of nationalism is becoming an absolute core player in 2025 and opportunities and risks are presenting themselves readily. As traders we need to be ready to take every opportunity that we can.