On February 3, 2025, global financial markets experienced significant downturns following the announcement of new tariffs by President Donald Trump. The U.S. imposed a 25% tariff on imports from Canada and Mexico, excluding Canadian energy products, which face a 10% tariff. China was also subjected to a 10% tariff and has vowed to retaliate. These actions have heightened fears of a global trade war, leading to substantial declines in stock markets worldwide.

In the United States, the Dow Jones Industrial Average futures fell over 650 points (1.5%) before the market opened, while S&P 500 and Nasdaq 100 futures dropped by 1.6% and 1.8%, respectively. Major companies like Nvidia and Tesla saw their stock prices decline by nearly 4%.

The Australian stock market was also affected, with the ASX200 dropping 152.9 points (1.79%) to 8,379.4 points. All sectors closed in negative territory, with significant losses in banking and mining stocks.

In Europe, the FTSE 100 fell by 106 points, Germanys DAX decreased by almost 2%, and Frances CAC 40 declined by 1.7%. Major European car manufacturers, including Volkswagen, BMW, and Daimler Truck, experienced substantial share losses between 5% to 6%.

Cryptocurrencies were not immune to the turmoil. Bitcoin dropped to a three-week low, and Ethereum experienced its largest three-day loss since November 2022.

These market reactions illustrate the concept of hysteresis in economics, where temporary shocks can have long-lasting effects on financial markets. In this context, the immediate impact of the tariffs has led to a significant decline in market prices. Over time, even if the tariffs are lifted or reduced, the effects of this initial shock may persist, causing prolonged periods of reduced investment and slower economic recovery.

Hysteresis can also influence the recovery phase. As markets begin to rebound, the memory of the downturn may lead to more cautious investment behaviors, potentially slowing the pace of recovery. Investors may require sustained positive signals before regaining confidence, leading to a gradual rather than immediate return to previous market levels.

In summary, the recent market downturn triggered by new tariffs exemplifies how hysteresis can cause temporary shocks to have enduring impacts on financial markets, affecting both the decline and subsequent recovery phases.

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