04:22 PM EST, 11/26/2024 (MT Newswires) -- The Toronto Stock Exchange fell for a second day amid tariff threats from Donald Trump, after the President-elect on Monday threatened blanket 25% tariffs on imports from Canada and Mexico, America's two-largest trading partners.

The S&P/TSX Composite Index closed down 5.21 points to 25,405.14. The biggest decliners on the day were Base Metals, down 1.5%, and Energy, down 2.2%. Information Technology was the biggest gainer, up 1.12%. Advancing listings led decliners 964 to 921, with 165 closing unchanged.

West Texas Intermediate (WTI) crude oil closed lower the as focus moved to this weekend's OPEC+ meeting and the impact of Donald Trump's tariff threats. WTI crude oil for January delivery closed down US$0.17 to settle at US$68.77 per barrel, while January Brent crude, the global benchmark, closed down US$0.20 to US$72.81.

Gold prices steadied late afternoon. edging up from a day-prior 3.4% drop after Donald Trump promised to impose punishing tariffs on imports from America's largest trading partners. Gold for February delivery was last seen up US$14.60 to US$2,657.20 per ounce.

Royce Mendes, Head of Macro Strategy at Desjardins, said Donald Trump has "amped up pressure" on Canadian policymakers to develop a comprehensive plan to navigate the next four years and more, covering Trump's term in office. Mendes noted Trump threatened to slap a 25% tariff on all goods from Canada and Mexico, with China facing an additional 10% tariff over and above what's already in place.

The pledge is more severe for Canada than the 10% across the board tariff on which he campaigned and importantly leaves other trading partners unscathed, at least for now.

"Such a limited move would allow for more substitution away from Canadian goods and towards those from jurisdictions that aren't being targeted," Mendes said, noting the rationale behind Trump's proposal is to force Canada and Mexico to address illegal border crossings and illicit drug exports.

According to Mendes, markets are digesting news of a 25% tariff with skepticism. He said the depreciation in the Canadian dollar of about 1% is notable, but doesn't seem to reflect a high conviction in these harsher than anticipated tariffs being implemented. Previous estimates from Desjardins showed a 10% tariff on all non-energy Canadian exports to the US, in conjunction with 10% tariffs on all other goods headed to America, would lower real GDP in Canada by near 1% by end 2026.

"Scaling the severity and speed of the tariff impact up to the new threat would obviously leave the Canadian economy materially worse off than that estimate, but would also have significant repercussions for the American economy," he added.

On what it all means for interest rates, Mendes said the Bank of Canada will not incorporate tariff threats until a policy is actually enacted. So Desjardins doesn't believe this will have much bearing on the upcoming monetary policy decision, with Desjardins continuing to expect the central bank will downshift back to a 25 basis point reduction.

But, Desjardins does have more conviction in its dovish view on the terminal policy rate for Canada now.

Mendes added: "These aggressive threats will at the least weigh on business investment in Canada as companies grapple with uncertainty about access to the U.S. market. Combined with the upcoming mortgage renewal wall and the slowdown in population growth, we see a 2% overnight rate as likely in just over a year's time."

Viktor Shvets, Global Head of Desk Strategy at Macquarie Capital, noted Trump's move rattled markets. Shvets said: "While not unexpected, and follows similar threats under Trump 1.0 that led to NAFTA renegotiation, it offers a foretaste of vols that investors are likely to encounter. While critical for traders, how should investors react to what is likely to be a never-ending flow of announcements and U-turns?"

Shvets noted the incoming secretary of Treasury is discussing re-balancing by "escalating to de-escalate" and using threats of tariffs to achieve what he describes as the "global economic reordering", forcing other nations to lower savings to boost demand, flattening the competitive environment and raising U.S. investment and productivity while reducing deficits.

Threats of strong USD and tariffs are key weapons, Shvets said. Macquarie Capital believes that Trump realizes that his win was almost entirely due to the "three I's" of inflation, inequalities and immigration, with inflationary prices being key.

Shvets said: "Unless there is an improvement, the electorate's revenge could be severe; and there is not much time, as within 12 months, mid-terms will dominate. Although Trump's ideas are in conflict with each other, at the end, it will be capital markets that will pass the judgement, explaining the nomination of Bessent for Treasury. Risks are high, but we remain convinced that 'guardrails' are sufficiently robust to avoid the worst outcomes."

Meanwhile, although tariffs remain the biggest topic today, minutes from the last meeting of the Federal Reserve's policy committee on November 6 and 7 were released on Tuesday and, according to BMO Economics, suggested that policymakers wanted to take a more gradual approach to lowering rates amid a still-strong economy. For BMO the bottom line is that earlier this month, Chair Powell noted that there was no hurry to cut rates and the Minutes "confirm a broad support for taking a more cautious approach in easing monetary policy".