Over the last week we have seen confusion and market volatility in response to contradictory statements from the Trump administration regarding the timing of tariffs on imports from Canada and Mexico. While initial indications pointed to a delay until April, President Trump later clarified via social media that the 25% tariffs would come into effect on March 4th. This announcement led to a surge in the U.S. dollar and a decline in the Canadian dollar and Mexican peso.

Then the focus shifted to the broader impact of Trump's trade policies. The President not only confirmed the tariffs on Canada and Mexico but also hinted at an imminent 25% tariff on European Union imports, targeting cars and other goods. This news triggered sharp declines in European stock markets, with investors concerned about the potential economic fallout and the likelihood of retaliatory measures from trading partners.

The week also saw developments in the ongoing conflict in Ukraine. President Trump made the controversial decision to cease aid to Ukraine, while simultaneously ordering U.S. Cyber Command to stop operations against Russian hackers. These actions were widely perceived as a negotiating tactic to pressure European allies into increasing their defence spending and to bring Russia to the negotiating table.

In response to the U.S. moves, European leaders, particularly Germany, stepped up their commitments to boost defence expenditure. The European Commission also proposed a significant increase in defence funding, highlighting the shifting geopolitical landscape and the need for Europe to take greater responsibility for its security.

Amidst the trade tensions, bond yields experienced significant movements. U.S. 10-year Treasury yields initially fell as investors sought safe-haven assets. However, yields later reversed course and began to rise, possibly reflecting concerns that the Federal Reserve may be hesitant to cut interest rates in the face of inflationary pressures resulting from the tariffs.

Oil prices experienced some weakness, partly due to concerns about reduced demand in the face of trade disruptions and partly in response to OPEC's decision to increase output from April onwards.

On the domestic front, the Reserve Bank of Australia (RBA) found itself grappling with the potential implications of the global trade tensions. While Australia's GDP growth forecast was revised upward to 0.7%, the RBA minutes from the February meeting suggested that the central bank remains cautious about the uncertain international environment. Market participants are now closely watching for any signs that the RBA may need to adjust its monetary policy stance in response to global developments.

Looking ahead, investors will be keenly awaiting further clarity on the scope and implementation of President Trump's tariffs, as well as any signs of retaliation from affected countries. The evolving situation in Ukraine and the European Union's response will also remain in focus. For Australia, the path forward will depend on how the global trade environment unfolds and its impact on key trading partners, with the RBA likely to maintain a watchful eye on both domestic and international developments. 

For now, the market response in Australia and elsewhere has leaned towards a risk-off approach. More volatile sectors like IT and Consumer Discretionary have fallen more than traditionally defensive sectors such as Healthcare, Utilities, and Consumer Staples. For now, the market does not seem to have parsed the stock specific implications of an escalation in tit for tat tariffs but that may change in the coming days and weeks.