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Risky assets, including stocks, commodity currencies, Bitcoin, and metals, pared Monday’s losses after the Trump administration agreed to postpone the 25% tariffs on Mexico and Canada. However, equity futures fell on Wall Street after China hit back with retaliatory levies on US goods early on Tuesday, with the impact likely to ripple through European markets.

Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau both agreed to tighten border controls to combat drug trafficking, particularly fentanyl. US President Donald Trump announced on Monday that he is pausing tariffs on both nations for one month while negotiations continue. As tariffs on China took effect, Beijing announced countermeasures starting on 10 February, potentially leaving time for negotiations.

Market risk appetite recovers

Despite China’s announcement, risk sentiment improved across all asset classes following Trump’s decision to delay tariffs on Mexico and Canada. The US dollar index erased early gains and ended little changed, while global stock markets pared their losses.

The sharpest reversals occurred in the Canadian dollar and Mexican peso, both of which erased their losses against the US dollar and closed higher on Monday. The euro also rebounded from a more than two-year low against the dollar. Other commodity currencies, such as the Australian dollar and New Zealand dollar, saw sharp rebounds from multi-year lows. Earlier in the session, these currencies had weakened against the US dollar by 2–3% at their lowest points.

Equities also recovered from session lows. In the US, the Dow Jones Industrial Average finished 122 points lower after falling more than 600 points intraday. The Nasdaq ended flat, recovering from a 2.5% intraday drop, while the S&P 500 slid 0.76%, trimming its earlier 1.9% decline. European benchmarks closed lower before Trump’s decision to delay the tariffs. However, China’s retaliatory measures weighed on sentiment, with most Asian markets were lower on Tuesday.

Additionally, Bitcoin rebounded above $98,000 (€95,039) at 9:00 am ECT after plunging to a day low of $91,178 (€88,412), according to Coinbase.

Notably, gold prices reached record highs amid ongoing geopolitical uncertainties. Spot gold surpassed $2,800 for the first time in history, while gold futures on Comex hit a new high of $2,857 before retreating.

Uncertainties remain, with focus shifting to China

Despite the temporary relief, markets remain on edge due to ongoing uncertainties. “Investors face a conundrum,” said Michael McCarthy, market strategist and chief commercial officer at Moomoo Australia. “The increased likelihood that the US President will continue using threats of chaos as a negotiating tool only adds to the risks.”

On Tuesday, China’s state Council Tariff Commission announced that China will impose 15% levy on coal and liquified natural gas (LNG) from the US and a 10% duty on American crude oil, farm equipment and certain vehicles staring from 10 February. Investors expected that Trump to delay tariffs on China in a similar manner.

While negotiations with Mexico and Canada continue, Trump stated that the US will hold discussions with China “probably over the next 24 hours” on Monday. He added that if no deal is reached, tariffs on China will be “very, very substantial”. Fox News reported that Trump is set to speak with Chinese President Xi Jinping regarding fentanyl trafficking.

On Sunday, the Chinese Ministry of Commerce issued its statement over the Lunar New Year holiday weekend, declaring that the US’s unilateral tariff hikes violate WTO rules. China intends to file a lawsuit with the WTO and firmly safeguard its own interests. A spokesperson for China’s Ministry of Commerce added that the tariff escalation will not resolve the US’s domestic problems, an apparent reference to fentanyl concerns. However, China left the door open for further negotiations, stating that it hopes the US will “correct its wrongful practices” and engage in “frank dialogues, strengthened cooperation, and conflict resolution based on equality, mutual benefit, and mutual respect”.