Investors say they know how to trade Trump 2.0

Investors dusted off their trade war playbooks on Tuesday, confident their portfolios were better-prepared for Donald Trump this time after the U.S. President-elect took to social media and pledged new tariffs on Mexico, Canada and China.

Muscle memory, formed over years of gyrating to Mr. Trump’s tweets and threats in his first term, sent the dollar surging and the peso, loonie and yuan sinking within moments of his posts on the Truth Social app about tariffs he would implement from day one of his presidency.

Yet, as traders drew breath, they saw little in Mr. Trump’s announcements to shift expectations about either his policies or his bluster, including a negotiating style that investors feel better-placed to navigate than they were eight years ago.

“The 25% tariff headlines … are not policies as yet but a good indication that under a Trump presidency they will no longer tolerate the relocation of export manufacturing from China to the U.S. NAFTA partners by Chinese companies,” said George Boubouras, head of research at K2 Asset Management.

Mr. Trump, who takes office on Jan. 20, said he would immediately impose 25% tariffs on imports from Canada and Mexico until they clamped down on drugs and migrants crossing the border. He pledged an additional 10% tariff on Chinese goods, which he also linked to drugs–particularly fentanyl.

The dollar jumped more than 2% on the Mexican peso and about 1.4% on the Canadian dollar, before settling around 1% higher on each.

The dollar hit a four-month high on China’s yuan although share indexes in Hong Kong and China were mostly steady, as investors took Mr. Trump’s linking of tariffs with drug traffic as reinforcing expectations he was opening a negotiation.

“China already has a template to deal with tariffs in reference to Trump 1.0,” said Simon Yu, vice general manager at Panyao Asset Management in Shanghai.

“Regarding other clampdowns such as tech-related sanctions, China may accelerate the process of self-reliance and import substitution.”

China said it had told the U.S. of progress in anti-narcotics enforcement and that “no one will win a trade war or tariff war.”

Time warp

Mexico’s tariff hit seemed to catch markets most off guard and was behind selling in automakers and other manufacturers across Asia that have plants in the United States’ southern neighbour.

Mr. Trump’s proposal appears to violate the terms of the U.S.-Mexico-Canada Agreement on trade.

Shares in Honda, which sends 80% of its Mexico production to the U.S., fell more than 2% to a 4-1/2 month low, while other car and component makers’ stocks fell.

The world’s biggest electronics contract manufacturer, Foxconn, which is building a server factory in Mexico with Nvidia, saw the biggest one-day drop in its share price in two months, although expectations of negotiations limited the selling.

“Any finalised package could be quite different from starting positions,” said Robert St Clair, head of investment strategy at Fullerton Fund Management in Singapore, which is positive on both U.S. and Chinese equity markets.

“President Trump is anti-inflation and seeks to improve the competitiveness and growth of U.S. manufacturing. These objectives dictate that tariffs on U.S. imports cannot be too widespread nor too extreme.”

To be sure, the reminders of Mr. Trump’s unpredictability and his negotiation-by-media style added a new source of background volatility and unease to the financial markets–although investors may feel there is not much they can do about that beyond hedging currencies.

“There are no obvious trades but a lot of headline risk in the coming months in the lead-up to Trump taking office,” said Jon Withaar, who manages an Asia special situations hedge fund at Pictet Asset Management.

“These social media comments create a lot of nervousness as to what is next.”

To some degree, that is already in the price as currency volatility and options-implied volatility have been rising for a few months and traders only need to draw on memories from a few years ago to remember the plays.

“It feels like we’ve just had a time warp back to 2016,” said Jason Wong, strategist at BNZ in Wellington, New Zealand.

“The market is going to be twitchy … but this is how he operates.”