Global financial markets are poised to remain heavily influenced by renewed trade tensions after the Trump administration imposed metal tariffs on its closest allies.

There seems to be no end in sight to the ongoing trade concerns, especially after the EU, Canada and Mexico swiftly retaliated against the imposition of US tariffs. With an apparent impasse in the third round of trade talks between the United States and China compounding the uncertainty, questions are being raised over the future of global trade.

The latest developments caught many by surprise. Tensions appeared to be easing in recent weeks after the US and China declared a truce in their fight over trade.

Lessons from the past have repeatedly taught investors that the US administration can be highly unpredictable. This characteristic unpredictably was showcased when Trump announced plans to impose heavy tariffs on $50 billion worth of Chinese goods.

Beijing has already made it clear to the United States that any move to implement tariffs on Chinese products would void trade talks; the markets will be closely monitoring Trump’s next strategic move.

It is worth noting that Washington’s decision to slap steel and aluminum tariffs on Canada and Mexico may negatively impact ongoing talks on the North American Free Trade Agreement (NAFTA).

With Trump going so far as to state that he “wouldn’t mind” scrapping the NAFTA (which is seen as a key trade deal for all three countries), sentiment is likely to remain cautious.

Interestingly, investors seem to be shrugging off trade concerns with global equity markets and riskier assets supported by improving risk sentiment. With Trump’s bellicose unpredictability fostering a sense of chaos and uncertainty, market players could receive a rude awakening if tensions continue to rapidly escalate.

Keep in mind that China has grown cautious over Trump’s volatile stance on trade, while tariffs on America’s closest trade partners could turn allies to enemies. Although President Trump's top economic adviser Larry Kudlow has blamed China, Europe, NAFTA and others for breaking trade rules and forcing Washington’s hand, other major nations believe otherwise.

Trump’s trade war must not be overlooked or underestimated as it remains a major threat to global stability and economic growth. Fears are likely to grow that an escalating tit-for-tat trade battle could potentially result in an all-out trade war.

Market anxiety over a potential trade war could fuel risk aversion, ultimately leaving riskier assets vulnerable to heavy losses while accelerating the flight to safety.

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