Stocks decline after Trump threatens new tariffs on Mexico

0
155

MAY 31, 2019

Stocks dropped Friday as investors feared President Donald Trump’s surprise threat of tariffs on all Mexico imports, amid a worsening trade war with China, could risk sending the U.S. economy into a recession.

The Dow was down 200 points, while the S&P 500 and Nasdaq dropped 0.8%. The S&P 500 was already down 5.3% this month through Thursday after trade talks fell apart with China and rhetoric on both sides worsened in May.

“President Trump’s latest trade bombshell … might turn out to be a short-lived threat that is quickly defused by commitments on border security, but it nonetheless looks damaging at a number of levels,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, wrote in a note. “At the big picture level, it suggests that Trump trade policy might well mean a permanent state of endemic uncertainty and instability in the global trading system not simply a hard-headed sequential re-set of prior arrangements that started with Mexico and proceeds via China to Europe and Japan.”

Shares of GM dropped more than 5%. Ford lost 4%. Both have significant production in Mexico that could be subject to tariffs. Shares of railroads Kansas City Southern and Union Pacific also fell. Fiat Chrysler traded 5.4% lower.

Corona and Modelo beer maker Constellation Brands slid 6.6% and was headed for its worst day since Jan. 9, when it lost 12.4%.

The closely watched 10-year Treasury yield dropped to lows not seen since 2017. The U.S. benchmark was yielding 2.17% Friday morning. It was above 2.5% at the beginning of the month. Mexico’s currency, the peso, tanked against the dollar by more than 2% to trade at 19.6 per dollar.

On Thursday evening, Trump announced the U.S. would impose a 5% tariff on all Mexican imports from June 10 until illegal immigration across the southern border was stopped.

The White House added in a statement that tariffs would be raised if the immigration issue persisted, with the charges set to increase even further if Mexico fails to take “dramatic action” to reduce or eliminate the problem.

Mexico is one of the U.S. largest trade partners. The U.S. imports every year billions of dollars worth of chemicals, transportation equipment and other goods from Mexico.

The news regarding U.S. tariffs on Mexican goods comes as the U.S. tries to work out a trade deal with China. Washington and Beijing have imposed tariffs on billions of dollars’ worth of one another’s goods since the start of 2018, battering financial markets and souring business and consumer sentiment.

Earlier this month, the two countries hiked tariffs on their goods, sparking a sell-off in equities.

The “worst case scenario is foreign governments (China/Mexico) simply wait Trump out given we’re 19 months from an election,” wrote Tom Essaye of The Sevens Report. “In that outcome, there is no China trade deal and tariffs (Chinese and Mexican) act as an anchor on global growth and market sentiment for 18 months, increasing the chances of a recession.”

The biggest Chinese newspaper explicitly warned the U.S. on Wednesday that China would be prepared to cut off rare earth minerals as a countermeasure. Chinese Vice Foreign Minister Zhang Hanhui then said Thursday that provoking trade disputes amounted to “naked economic terrorism. ”

Not helping things, the trade war appears to be dragging down the Chinese economy. The country’s manufacturing activity contracted more than expected in the month of May, China government data out overnight showed. The official manufacturing Purchasing Managers’ Index (PMI) for May was 49.4, down from April’s reading of 50.1. PMI readings below 50 signal contraction.


Courtesy/Source: CNBC

LEAVE A REPLY

Please enter your comment!
Please enter your name here