Canadian stocks will be highly volatile this week as investors react to the potential tariff war between the United States and Canada. The S&P/TSX Composite Index will likely retreat, joining its American counterparts like the Dow Jones and S&P 500 that have plunged by over 2% in the futures market.
US and Canadian trade war
The main catalyst for the S&P/TSX Composite index is the new trade war between Canada and the United States.
Donald Trump has now fulfilled his campaign promise of boosting tariffs on goods from Canada, Mexico, and China. In an X post, he noted that the US will impose a 25% tariff on most Canadian goods and 10% on the country’s energy products.
Canada has threatened to reciprocate and impose tariffs of its own, a move that may continue in the coming weeks. These tariffs are huge, considering that the two are some of the biggest trade partners with annual trade volume of over $923 billion.
The US sold goods worth over $441 billion in 2023 and imported $482 billion. While Trump has cited the migration issue, analysts believe that his main issue is the $481 billion trade deficit, which he believes that Canada is stealing from the US.
The total trade deficit is actually smaller than the $481 billion since the US sells services worth over $121 billion to Canada and imports $107 billion. Taken together, the deficit is in the $20 billion range.
The challenge, however, is that these tariffs will benefit no country as residents will be forced to pay higher prices. Also, it is likely that many companies in the TSX/Composite index and those in American indices like the Dow Jones and the S&P 500 indices will see thinner margins as supply chain issues remain.
Is it time to buy or sell the TSX index?
The S&P/TSX Composite index will likely crash on Monday as investors react to the tariffs. For example, it dropped by over 1% on Friday after it became clear that Trump would continue with his tariffs.
Analysts believe that Canadian companies are at a bigger risk than American ones because many of them do a lot of business in the United States.
Worse, the tariff comes at a time when the TSX index formed a small double-top pattern at the C$25,840 level. A double-top is one of the most bearish patterns in the market.
Therefore, there is a risk that it will crash to the next key support level at C$24,250, its lowest level on December 16.
In the future, however, the index will resume the uptrend because the trade war will ultimately end with a negotiated agreement.
The last trade war between the US, Canada, and Mexico ended with the USMCA deal. Also, the trade war between the US and China also ended with a trade deal at the end of his tenure.
Therefore, the most likely scenario is where the S&P/TSX Composite index retreats and then resumes the uptrend and retests the highest point on record. It will also rebound as the Bank of Canada slashes interest rates.
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