31/ May’19

Stocks and bond yields slump after Trump hits Mexico with tariffs

US to place new tariff on Mexico over illegal immigration

Rep. Mark Green (R-Tenn.) reacts to President Trump’s tweet that the U.S. will impose a 5 percent tariff on imports from Mexico.

Stocks were sharply lower Friday as investors feared President Donald Trump's surprise decision late Thursday to impose tariffs on all Mexican imports, combined with the trade war with China, risks slowing economic growth.

The S&P 500 index looks likely to end the month down 6 percent and the Dow Jones Industrial Average may close Friday with its longest streak of weekly losses since 2011.

The U.S. will impose a 5 percent tariff on incoming Mexican products until the country limits illegal immigration on the U.S. southern border, Trump announced in a tweet Thursday night. The tariff will go into effect on June 10 and may rise to 25 percent by October.

“Automakers may indeed see large financial impact and uncertainty from the tariffs, as all major original equipment manufacturers import a considerable portion of the vehicles they sell in the U.S. from Mexico,” Deutsche Bank research analyst Emmanuel Rosner said in a research note. “They also use large content imported from Mexico in the vehicles they produce in the U.S.”

“We believe the tariffs on vehicles would undoubtedly be passed on to consumers, which would raise the price of vehicles sold in the U.S. by an average of about $1,300,” he added.

Meanwhile, China is planning further retaliation against U.S. import tariffs by restricting exports of rare earth minerals used in electronics and may target specific American companies according to media reports.  The trade war is already affecting Chinese economic growth with the official manufacturing purchasing managers index falling into a contraction below the 50 index level.  China's official NBS manufacturing PMI fell to 49.4 in May, from 50.1 in April in data published Friday.

China, Canada and Mexico are the U.S.'s top trading partners, with over $600 billion of imports and exports from each country, according to the U.S. Census bureau. 

Shares of trade-dependent corporations, such as carmakers and semiconductor manufacturers, fell sharply. Automakers  GM and Ford tumbled. Both companies have significant production in Mexico that could be subject to tariffs. Shares of railroads Kansas City Southern and Union Pacific also fell.

The yield on the 10-year U.S. Treasury fell to 2.15 percent, a new 20 month low. The bond market is currently pricing-in three Federal Reserve interest rate cuts by the end of next year, with Vice Chairman Richard Clarida on Thursday suggesting the central bank would be open to reducing rates if economic growth slows and inflation falls.

But the inflation measure closely watched by the Fed – personal consumption expenditures price index – rose in April for the first time this year in data published early Friday. The PCE index was up 0.2 percent for the month and 1.6 percent annually, the Commerce Department said.

The Stoxx Europe 600 Index fell to its lowest level in 15 weeks, led by autos and basic resources companies with European shares set for largest monthly drop since January 2016.

China’s Shanghai Composite closed down 0.24 percent, the Hang Seng was off 0.79 percent and Japan’s Nikkei 225 ended lower 1.63 percent.

Crude oil prices were also down sharply on fears slower economic growth would hit demand. West Texas Intermediate, the U.S. benchmark, tumbled 2.33 percent to $55.27 per barrel. Brent crude oil, the European benchmark, dropped 2.3 percent to $63.82 a barrel. Crude oil prices are down about 11 percent in May, the biggest monthly fall since last November.

Gold gained 0.6 percent to $1,296.72 an ounce, the highest in more than two weeks.