February 3rd Market Overview

Happy Monday.

Markets had a dramatic lunch time recovery today after Mexico tariff negotiations put on a 1 month pause. Manufacturing data showed unexpected strength. Trade tensions with Canada and China remain high.

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Let's dig in...

Executive Summary

• Markets execute stunning reversal after Mexico-U.S. reach one-month tariff pause agreement
  

• Manufacturing sector breaks 26-month contraction streak, signaling economic resilience
  

• Canadian banks face severe pressure as Ottawa announces retaliatory tariffs on $155B of U.S. goods
  

• Morgan Stanley warns sustained tariffs could lift inflation to 3.2% and cut GDP growth to 1.2%
  

Market Overview

Key Market Drivers

1. Tariff Implementation: Trump administration imposes 25% tariffs on Canada, 10% on China, while pausing Mexico tariffs for negotiations
   

2. Border Security Deal: Mexico agrees to deploy 10,000 soldiers at U.S. border, securing one-month tariff pause
   

3. Manufacturing Rebound: ISM index hits 50.9%, marking first expansion since September 2022
   

4. Policy Uncertainty: Boston Fed’s Collins signals no urgency for rate cuts amid strong economic data
   

Stock Spotlight

• $TGI: ▲34% after Warburg Pincus and Berkshire Partners announce $3B acquisition ($26/share cash offer), marking significant aerospace sector consolidation

• $TSN: ▲1.8% on strong fiscal Q1 results with EPS of $1.14 beating $0.90 estimates, driven by 2.3% year-over-year sales growth in beef category

• $C: ▼4.9% with twice the decline of peers as Mexican tariff uncertainty impacts Banamex spinoff strategy; Wells Fargo notes Mexico represents $72B (4%) of total credit exposure

• $STZ: ▼6% as largest U.S. beer importer faces potential disruption to Corona and Modelo brands from Mexican trade tensions

Big Name Updates

• Canadian Bank Selloff: Major banks hit hard by retaliatory tariffs - $CM ▼8% leads declines, followed by $BNS ▼7.5%, $BMO ▼6%, $TD ▼5%, $RY ▼4.5%. Wells Fargo analysts note significant cross-border exposure risks

• Auto Sector Impact: $GM ▼8% and $F ▼4% face pressure as integrated North American supply chains threatened by tariffs. Parts suppliers Cummins and Aptiv also showing weakness

• Crypto Names Tumble: $COIN ▼6% and $MSTR ▼7% track Bitcoin's decline below $97,500, with miners $RIOT and $MARA both dropping over 7%

Other Notable Company News

• Retail Sector: $PVH ▼3% after Wells Fargo downgrade to equal weight from overweight, citing potential value trap amid mounting industry challenges

• Energy Sector Resilience: Oil services names advance as WTI crude gains 2% to $74.20 on trade tension supply concerns

• Consumer Defensive Rotation: $WMT ▲1.1% and $PG ▲0.9% attract buyers seeking domestic revenue exposure
  

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Sector Watch

Bond Market

• Bank projects headline PCE inflation could reach 2.9-3.2% over next 3-4 months, up 0.3-0.6 percentage points from baseline

• GDP growth faces potential decline of 0.7-1.1 percentage points over next 3-4 quarters, possibly dropping to 1.2-1.6% range

• Corporate bond spreads widen, with high-yield debt underperforming (-0.3%) as markets price in cross-border trade risks

Policy Watch

• China Response: Files formal WTO complaint, stating U.S. tariffs "seriously violate WTO rules" and disrupt normal economic cooperation

• Canadian Retaliation:

  • Implements immediate 25% countermeasures on $155B of U.S. goods

  • Targets include American beer, wine, bourbon, fruits, vegetables, clothing, and shoes

  • PM Trudeau emphasizes "far-reaching" response matching U.S. measures

• Mexico Negotiations:

  • One-month tariff pause secured after agreement on 10,000 border troops

  • High-level team assembled: Secretary of State Rubio, Treasury's Bessent, Commerce's Lutnick

  • President Sheinbaum confirms "series of agreements" reached with focus on border security

• European Union Tensions:

  • Trump signals potential tariffs, calling EU practices "out of line"

  • Hints at different approach for UK due to "more balanced" trade relationship

  • EU spokesperson warns of firm response to any U.S. tariff actions
    

What to Watch

1. Mexican Border Developments:

• Implementation timeline for 10,000 troop deployment

• Progress of high-level trade negotiations

• Impact on cross-border supply chains

2. Canadian Retaliation:

• Effect on integrated auto manufacturing

• Consumer price impacts from reciprocal tariffs

• Banking sector stress indicators

3. Manufacturing Momentum:

• Sustainability of PMI expansion

• Supply chain adaptation to tariffs

• New orders trend (currently showing strength)

4. Fed Response:

• Impact of tariffs on inflation expectations

• Changes in rate cut probability

• Regional Fed president commentary