Investing.com -- President-elect Donald Trump will begin his term with aggressive trade measures, BCA Research said, potentially announcing a 10% global tariff or targeted tariffs of up to 25% on Canada, Mexico, and 10% on China within his first week.
“Tariffs will be the big news on Day One, or Week One, and we expect President Trump to come out swinging,” the firm said in a Thursday report.
“We expect it to be aggressive because now is his greatest period of political capital and leverage over other countries. The US job market is strong, global manufacturing is weak, and the midterm election is 22 months away,” it added.
BCA anticipates that these tariffs will cause immediate price increases, disrupt global manufacturing, and potentially lead to a deflationary pullback in the longer term.
Simultaneously, Trump’s tax cuts—estimated at $4.2 trillion over a decade—are expected to inflate the budget deficit and drive inflationary pressures, keeping Treasury yields elevated. BCA highlights a 52 basis point rise in 10-year Treasury yields since the election, underscoring expectations of budget deficit expansion under Republican leadership.
In turn, this will likely keep rates higher for longer and the dollar strong, BCA said in its report.
The greenback has rallied 7% since its trough last year, with BCA strategists recommending staying long on the currency until tariff announcements are fully priced. However, the firm cautions that “if the tariffs disappoint expectations, then the dollar will fall,” and any retracement could follow once initial market reactions stabilize.
Oil markets have also responded strongly, with Brent crude rising 7% since the election and 17% since its 2024 low. This rally aligns with ongoing geopolitical tensions, particularly between Israel and Iran, which BCA believes are likely to escalate.
Furthermore, Trump’s enforcement of new sanctions on Russia and China, including controls on semiconductor exports, may additionally bolster energy prices.
Equities, however, are expected to face near-term volatility. The combination of rising Treasury yields and uncertainty over Trump’s tariff strategy may weigh on markets, particularly as supply chain disruptions take hold.
BCA advises positioning for heightened volatility while favoring defensive sectors like aerospace and defense.
It also recommends maintaining a long position in US small-cap stocks over their global counterparts.