Markets Mount Late-Session Rally as Tariff Tensions Cool Due to Diplomatic Efforts

Financial markets experienced a volatile session on Tuesday as escalating trade tensions between the United States and Canada rattled investor sentiment. Earlier in the session, the S&P 500 attempted a rebound from technical support near 5560 (10% correction territory), surging above 5600, only for the rally to stall after President Trump announced a 50% tariff on Canadian steel and aluminum imports in retaliation for Ontario’s new 25% electricity surcharge on U.S. consumers.

The renewed trade war rhetoric quickly led to a war of words between officials on both sides of the border. However, as the session progressed, tensions cooled after Commerce Secretary Howard Lutnick reached out to Ontario Premier Doug Ford in an attempt to de-escalate the situation. This, combined with reports of a potential Ukraine-Russia ceasefire, helped stabilize markets, allowing the S&P 500 to rally sharply, hitting a session high of 5645—a 110-point reversal from intraday lows.

Despite the late-day rally, the choppy trading highlighted persistent investor concerns over headline risk tied to tariffs, with President Trump set to speak after the close and Wednesday’s Consumer Price Index (CPI) report looming as another major market-moving event.

The Tariff Dispute: How It Began and What’s at Stake

The latest flare-up in U.S.-Canada trade tensions began when Ontario Premier Doug Ford announced a 25% surcharge on electricity exports to the United States, citing Trump’s recent tariffs on Canadian goods. The move was set to impact Minnesota, New York, and Michigan, which rely on Ontario for power.

Trump swiftly responded on Truth Social, stating that he would impose a 50% tariff on Canadian steel and aluminum, while also threatening future tariffs on Canadian automobile exports. Trump’s post further escalated the situation by suggesting a national emergency declaration on electricity, as well as a provocative remark about Canada potentially becoming the “51st state” of the U.S.

Ford, in response, warned that Ontario would not “roll over” and was prepared to retaliate “dollar for dollar” if the U.S. implemented additional tariffs. Ottawa also signaled its willingness to impose countermeasures should the steel and aluminum duties go into effect.

Despite the sharp rhetoric, Lutnick’s intervention helped calm tensions, with Ontario agreeing to suspend the 25% surcharge ahead of further discussions. Ford confirmed that he would meet with Lutnick on Thursday to discuss potential renegotiations of the U.S.-Mexico-Canada Agreement (USMCA) before the April 2 deadline.

How the Tariffs Impact U.S. States

The economic consequences of the trade dispute are particularly concerning for states heavily reliant on Canadian electricity and trade.

- Minnesota: The state imports electricity from Ontario, though officials downplayed the impact. Governor Tim Walz criticized Trump’s actions, warning that “Minnesotans struggling with high energy costs will be the first victims of this trade war.” His bigger concern, however, was Canadian potash imports, a key agricultural input, potentially facing new tariffs.

- New York: Governor Kathy Hochul ordered an immediate review of how the tariffs might drive up energy costs in the state, warning that “these federal tariffs have been poorly conceived, crafted in secret, and serve only to destabilize markets.”

- Michigan: State officials expressed concerns over potential grid reliability risks if electricity flows between the U.S. and Canada were disrupted. The Michigan Public Service Commission noted that most electricity is produced in-state, but disruptions could remove a key buffer against grid-wide outages.

While Trump’s tariffs were initially set to go into effect on Wednesday, March 12, Ontario’s decision to suspend its electricity surcharge may provide an opportunity for de-escalation through diplomatic talks later this week.

Market Implications and Investor Takeaways

Tuesday’s market volatility illustrated how trade policy remains a key risk factor for equities, particularly as inflation concerns intensify ahead of the Federal Reserve’s meeting next week.

- Tariff-sensitive sectors such as steel, aluminum, and automotive saw sharp intraday swings as traders reacted to headlines.

- The S&P 500’s late-day rally was fueled by optimism that diplomatic talks could de-escalate trade tensions, but traders remain cautious given Trump’s unpredictability and his upcoming post-market speech.

- Tomorrow’s CPI report is now in sharp focus. A weaker-than-expected inflation reading could revive hopes for Federal Reserve rate cuts, while hotter-than-expected data could exacerbate market concerns about inflationary pressures from tariffs.

With U.S.-Canada trade frictions far from resolved, and the possibility of more aggressive tariff threats in April, investors should brace for continued headline-driven volatility in the days ahead.