Andy Friedman of The Washington Update Andy Friedman of The Washington Update.

While President Donald Trump’s recent decision to impose tariffs on aluminum and steel imports has roiled the markets, brace for continued volatility if two other near-term issues materialize: the issuance of Special Counsel Robert Mueller’s report on his investigation into Russian collusion, and the prospect of the Democrats winning a congressional majority in the midterm elections, according to Andy Friedman of The Washington Update.

Before the threat of tariffs, the markets “have been happy with his administration’s policies,” including tax reform, Friedman said Monday. The markets “do not want to see [Trump’s] initiatives impeded or interrupted.”

In light of Trump’s recent decision to impose a 25% tariff on imported steel and a 10% tariff on aluminum, the threat of a “repatriation” tax will potentially surface.

To impose the tariffs, Trump is using his “Section 232 authority,” which allows him to impose tariffs for national security reasons, notes Ed Mills, Washington Policy analyst for Raymond James, in his Monday commentary.

Trump and the Commerce Department have argued that the tariffs “are necessary to ensure there is adequate domestic steel and aluminum production should there be a national security emergency,” Mills writes. “As the tariffs become official, we will be watching to see if the administration will be convinced to exclude certain countries an option that White House trade official, Peter Navarro, sent conflicting messages about over the weekend.”

But Friedman told ThinkAdvisor that he’d be “very surprised if there is a move to impose a repatriation tax,” as eliminating the tax on repatriated profits “was one of the centerpieces of tax reform, something the Republicans have been trying to do for years. They are not going to backtrack on that.”

Congress, Friedman said, “could pass legislation to overrule the president on tariffs, although it presumably would take a 2/3 vote to override a presidential veto, not to mention a lot of intraparty fighting.”

House Speaker Paul Ryan, who told the White House Monday to drop the tariffs’ plan, “will try to persuade Trump to backtrack,” Friedman adds, “but Trump is not known to give in to outside pressure once he’s announced a decision. So it’s a sticky situation at best.”

Trump told Canada and Mexico on Monday that he would lift possible tariffs on them if they agreed to renegotiate the North American Free Trade Agreement.

“Saying he will drop the tariff idea if Canada capitulates on NAFTA concessions is not much of a back track,” said Freedman. “Canada is unlikely to capitulate under the threat of tariffs (or otherwise), and in any event NAFTA has nothing to do with tariffs imposed on other countries around the world.”

As to further market volatility, the markets may be concerned if Mueller’s report “asserts credible evidence that the Trump campaign colluded with Russia to impact the 2016 election, or that Trump impeded Mueller’s investigation,” Friedman said.

He noted last year “when a false report that Mueller had reached such a conclusion prompted a short-lived 350 point drop in the Dow.”

The markets may also be concerned if it appears that the Democrats will take control of one or both houses of Congress in the midterm elections.

“Split government almost certainly will thwart the implementation of administration initiatives,” Friedman said. “Further, a Democratic-led House is more likely to follow up on a critical Mueller report than one controlled by Republicans, further constricting the administration.”

— Check out Trump’s Tariff Announcement Unnerves Markets on ThinkAdvisor.