07:25 AM EDT, 04/04/2025 (MT Newswires) -- With the scope and magnitude of United States President Donald Trump's announced tariffs much larger than expected, equity markets closed Thursday deep in the red and sovereign bond yields declined around the world, noted Desjardins.

The question is whether these tariffs will go ahead as planned, said the bank. If so, how long will they remain in place and will the proposed sector-specific tariffs still come on top of the Liberation Day duties?

The Administration is set to impose a 10% tariff on all countries at 12:01 a.m. ET Saturday. Individualized reciprocal tariffs will, however, only take effect next Wednesday. U.S. Treasury Secretary Scott Bessent indicated that, so long as trading partners don't retaliate, the announced tariffs won't head higher, implying that there is room for them to fall. Other countries now have two options: negotiate or retaliate.

The response has been varied, pointed out Desjardins. Australia, Switzerland and Singapore have all but ruled out retaliation. The United Kingdom expects to negotiate a trade deal. European Union trade ministers will meet on Monday to discuss a likely retaliation. Japan and South Korea expressed regret and promised to respond. China announced that the country would take countermeasures against the tariffs.

Canada dodged a further increase in tariffs, but still faces previously announced actions. Energy and potash imports from Canada are being charged 10%, while all other non-USMCA-compliant goods are tagged with a 25% duty. Should Canada be able to satisfactorily resolve remaining border frictions, the tariff rate on non-USMCA-compliant goods would fall from 25% to 12%.

That said, autos now headed south from Canada will be hit with a 25% tariff, although there is an exemption for the U.S. content in those vehicles. That 25% tariff is set to extend to auto parts on May 3. Separate 25% steel and aluminum levies are also in effect.

Overall, Canadian imports face an average effective tariff rate of roughly 14%. That's lower than many other major trading partners. For example, China faces the prospect of an average effective tariff rate of more than 50% being applied to its goods shipments.

Thursday, Prime Minister Carney announced reciprocal 25% auto tariffs that will apply to non-Canadian and Mexican content in passenger vehicles shipped north from the U.S. Canada had already responded to prior U.S. tariff announcements with 25% tariffs on $60 billion worth of U.S. goods. Imports from the U.S. face an average effective tariff rate of 3%-4% at the Canadian border, but that could rise to roughly 13% if the final $125 billion dollars of proposed duties go ahead.

That said, given the relative reprieve for Canada and Mexico on Liberation Day, it's possible that the North American trading partners are set up for a more constructive path forward in the weeks ahead, stated Desjardins.

Canada has implicitly become more competitive relative to other American trading partners. To what extent businesses north of the border can capitalize remains to be seen, added the bank. Americans may be willing to buy more or pay higher prices for Canadian goods that face lower tariff rates than those coming from other countries.

However, a larger slice of a much smaller pie could still leave Canada worse off in absolute terms. Canada faces a risk that the U.S. economy slows so much that gaining market share doesn't translate into higher sales. The prospect for global growth also matters insofar as an extremely pessimistic outlook will weigh significantly on commodity prices.

U.S. officials are preaching that short-term pain will translate into longer-term gains for Americans. But in the near-term, households and businesses are set to see higher prices as a result of these tariffs, with some early estimates suggesting CPI inflation could rise above 3% and potentially toward 4%.

The re-scrambling of supply chains could add to the pain, with job losses resulting. The Trump. Administration is hinting that tax cuts and deregulation will power a rebound, but details of those plans remain sparse at this time.

America headed into the year with an air of invincibility, as U.S. stock indexes kept reaching new highs. All that has changed in recent months as Trump's resolve on tariffs has become clearer. Thursday, U.S. equity indexes had their worst day since 2020 and credit spreads were sharply wider.

Despite the risk-off tone in markets, the US dollar isn't acting like a safe haven, selling off 1.5% on Thursday. If the goal of all this was to generate a weaker US dollar, as some have argued is imperative for enhancing America's export competitiveness, then it's working, noted Desjarinds. Unfortunately for the Administration, it's coming alongside a much more pessimistic outlook for the U.S. economy.

While the Canadian dollar performed well against the US dollar on Thursday, its exposure to global commodity prices and the U.S. economy has translated into a depreciation versus the euro, Japanese yen and Swiss franc.

The rising odds of a U.S. recession are seeing U.S. Treasury yields falling much faster than those on Government of Canada bonds, with the spread between 10-year rates closing the day at its narrowest level since early December.

The bid in UST on THursday was, however, not as pronounced as would typically accompany a 4.8% decline in the S&P 500 Index. That could reflect the market's fear that higher inflation won't follow economic activity lower. Breakeven inflation rates embedded in two-year TIPS have increased to their highest level since early 2023.

In addition, although 10-year breakevens declined, it's hardly the type of move that has historically been correlated with this magnitude of selloff in the stock market.

For one reason or another, there are still market participants who don't view Wednesday's tariffs announcement as a cataclysmic event. Should Trump hold firm on the current levels and deadline for tariffs, there's likely further for equity indexes to fall, according to the bank. While it remains likely that Trump will eventually be willing to negotiate, the Administration is not operating in a vacuum and the fallout from Liberation Day could lead to unintentional consequences even if all along the plan was to pull back