The global financial markets experienced a day of mixed signals and significant shifts, primarily driven by evolving trade dynamics between the United States and its key partners, alongside fresh inflation data. Stocks initially opened higher on Friday following mixed Personal Consumption Expenditures (PCE) Price Index data for May to June, which saw headline inflation rise 2.3% annually in line with expectations, but core PCE (excluding food and energy) surprisingly climbed 2.7% year-over-year. This, coupled with encouraging news of U.S.-China trade progress, initially lifted market sentiment. However, the optimism proved fleeting as benchmarks turned lower in afternoon trading, reacting sharply to President Donald Trump's announcement that the U.S. was “terminating ALL discussions on Trade with Canada, effective immediately.”

Trump's abrupt decision stemmed from Canada's newly implemented Digital Services Tax (DST), which he described as “a direct and blatant attack on our Country.” This 3% levy, set to take effect on Monday and retroactively applied to revenues from online user engagement in Canada since 2022, targets major U.S. technology companies like Amazon, Google, Meta, Uber, and Airbnb. Industry estimates suggest this could result in an initial collective bill of nearly $2 billion for U.S. firms, with subsequent annual payments exceeding $1 billion. Trump warned Canada of forthcoming tariffs within seven days, asserting the U.S.'s “economic power” and calling Canada's action “foolish.” The U.S. Administration, supported by industry groups like the Computer & Communications Industry Association, views this tax as discriminatory against American digital exports.

The termination of talks marked a fresh escalation in the volatile U.S.-Canada trade relationship, despite a brief thaw in May when Canadian Prime Minister Mark Carney visited Washington, and a subsequent G7 summit where both sides agreed to a 30-day window for dispute resolution. Prime Minister Carney, while affirming Canada's commitment to continue negotiations “in the best interests of Canadians,” has previously called Trump's tariffs “unjust” and threatened retaliatory measures if a successful agreement isn't reached. Canada's Finance Minister, François-Philippe Champagne, reiterated that the legislation, passed by Parliament, would not be delayed despite U.S. pressure.

For Canadian businesses, the constant shifting of trade policies has created crippling uncertainty. Wes Love, owner of Taurus Craco, a machinery import and distribution business, highlighted the severe impact, recounting a C$35,000 punitive tariff payment due to a missed deadline. He emphasized that for small businesses, “indecision is killer,” drawing a parallel to playing a sport where rules constantly change. The Canadian economy, heavily reliant on trade with the U.S. (75% of its exports go south), has already felt the strain, with growth slowing significantly in the first quarter of 2025 to 0.8% and even shrinking 0.1% in April. While the manufacturing sector is often spotlighted in tariff discussions, the service sector, the “unloved stepchild” of the economy, also faces profound uncertainty, with inquiries for technology and management consulting firms like ElevatIQ down by 50%. Businesses have delayed major investments and sought alternative customers, with Canadian exports to the U.S. dropping over 15% in April, including significant declines in steel, aluminum, and vehicle exports.

Canada's motivation for the DST is multifaceted: the Parliamentary Budget Office estimated it would generate over $7 billion in revenue over five years and serve to update the tax code to capture revenues earned in Canada by foreign firms. The delay in implementing this tax was partly due to a desire for an overarching international digital taxation plan, but Canada proceeded independently when delays persisted. Countries like France, Italy, Spain, and the United Kingdom already have similar digital tax regimes. Despite the challenges, some Canadian business owners, like Wes Love, express resilience, emphasizing their ability to navigate difficulties if only given a stable set of rules.

Amidst these trade turbulences, individual stocks experienced significant movements. Nike (NKE) emerged as the top performer on the Dow Jones, surging 15.3% after disclosing better-than-expected fiscal fourth-quarter results, despite year-over-year declines in earnings and revenue. Chief Financial Officer Matthew Friend expressed optimism for moderating “headwinds” ahead. HSBC Global Research upgraded Nike to Buy, citing “tangible evidence that Nike has a path to see its sales rebound... and its margins to be repaired,” even with ongoing tariff headwinds. The analyst note praised Nike as “a battered leader with a convincing reboot” and a “full refreshed team” acting with speed and experience, signaling a potential inflection point after years of struggles due to inflation, U.S.-China tensions, and lack of innovation.

Despite the afternoon downturn spurred by the Canada news, the S&P 500 closed up 0.5% at 6,173, and the Nasdaq Composite added 0.5% to 20,273, both achieving new all-time closing highs. The Dow Jones Industrial Average also gained 1% to end at 43,819. This suggests that while trade tensions create volatility, the broader market showed resilience or specific sector strength, like that seen with Nike. The situation underscores the complex interplay of economic data, trade policy, and corporate performance in shaping market outcomes.