Investing.com - Canada’s main stock index fell on Tuesday as investors assessed the impact of U.S. President Donald Trump’s announcement of 25% increase on steel and aluminum tariffs.

By the 4:00 ET close, the S&P/TSX 60 index had dropped 12.7 points or 0.86%.

The Toronto Stock Exchange ’s S&P/TSX composite index declined by 132 points, or 0.54%, after sinking by 378 points or 1.5% on Monday, marking its lowest close since November 4, one day prior to Trump’s election.

U.S. President Donald Trump announced a significant increase in tariffs on steel and aluminum imports from Canada on Tuesday, escalating trade tensions between the two countries. The new tariffs will raise the duty on these imports to 50%, up from the current 25%. This action is set to take effect on March 12th.

Equities on Wall Street, meanwhile, posted even larger decreases, as traders noted concerns that confusion around Trump’s on-again, off-again tariffs could derail consumer spending, push up inflation expectations and ultimately weigh on economic activity.

Trump himself did not rule out that his levies on Canada, Mexico and China could spark a recession during an interview with Fox News over the weekend.

Markets were also gauging the prospects of new leadership in Ottawa after former central banker Mark Carney won a vote in the ruling Liberal Party to succeed Justin Trudeau as Prime Minister. Carney said the transition of power would be quick and "seamless," although declined to discuss any plans to speak with Trump.

Elsewhere, the Bank of Canada is tipped to slash interest rates by another 25 basis points on Wednesday, as policymakers aim to provide support to an economy that analysts say could be hit particularly hard by Trump’s tariffs.

U.S. stocks close lower

U.S. stocks opened mixed, but fell lower throughout the day after Trump’s tariff announcement amid fears over a potential recession sparked sharp declines on Wall Street.

By 4:00 ET, the S&P 500 closed down 42.6 points or 0.76%, NASDAQ Composite dropped 32.2 points or 0.18%, while the Dow Jones Industrial Average fell by 479 points or 1.14%.

This comes after he benchmark S&P 500 slumped by 2.7% on Monday, extending a sell-off last week, and the tech-heavy Nasdaq 100 dropped to its worst day since 2022. The 30-stock Dow Jones Industrial Average tumbled by 2.1%.

Adding to the dour sentiment in markets was uncertainty swirling around Trump’s mass layoffs of federal employees and discussions in Washington on a bill to avert a government shutdown. House Republicans are expected to vote on a spending package backed by Trump on Tuesday.

Treasury yields, which move inversely to prices, also fell, with analysts attributing the drop to a sign of ongoing nervousness around the state of the economy. The U.S. dollar index , a tracker of the greenback against a basket of its currency peers, ticked higher as well.

Meanwhile, the CBOE Volatility index , dubbed the "fear index" by many investors, jumped to its highest close since August 2024.

"Severe risk-off and elevated volatility characterised a rough day for U.S. markets," analysts at ING said in a note to clients. "No Monday crash here, but certainly a slow-grind move south, extending from preliminary weakness last week."

Oil aided by weaker dollar

Oil prices climbed, erasing earlier losses, thanks to weakening U.S. dollar, although fears that an economic slowdown and an escalating trade war could dent demand capped gains.

Crude prices were nursing steep losses over at least the past three weeks, as uncertainty over Trump’s tariff agenda grew after his flip-flopping on tariffs against Canada and Mexico.

Trump’s imposition of 20% tariffs on China -- the world’s biggest oil importer -- also weighed sentiment. Beijing has retaliated with its own measures.

At 5:00 ET, Brent oil futures expiring in May rose 0.9% to $68.89 a barrel, while West Texas Intermediate crude futures advanced 0.9% to $66.59 a barrel.

Gold advances

Gold prices rose in trading, as the U.S. dollar lingered near a four-month low amid mounting U.S. recession fears.

Investors were cautiously awaiting the U.S. consumer price index (CPI) data scheduled for release on Wednesday. The data could influence the Federal Reserve’s upcoming monetary policy decision next week, with the central bank broadly expected to leave interest rates unchanged as officials attempt to parse through the effect of Trump’s trade taxes.

Spot gold rose 0.9% to $2,916.06 per ounce, while gold futures expiring in April gained 0.8% to $2,922.91 an ounce by 5:00 ET.

(Scott Kanowsky also contributed to this article)