31/ May’19

Stocks seen opening sharply lower, bond yields tumble after Trump hits Mexico with tariffs

Trump administration discussing Fannie, Freddie stock offering: Gasparino

FBN’s Charlie Gasparino on the Trump administration’s push to get Fannie Mae and Freddie Mac out from under government control.

President Trump's decision to slap tariffs on Mexican goods rattled Wall Street on Friday, sending major stock indexes sharply lower in premarket trading.

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.

The tariff will go into effect on June 10, Trump said in a tweet late Thursday, while threatening to raise it further “until the Illegal Immigration problem” is resolved.  On July 1 the tariff could rise to 10 percent; on Aug. 1 it could rise to 15 percent; and on Oct. 1 it could climb to 25 percent.

Futures for the Dow Jones Industrial Average were down 1.18 percent — nearly 300 points — and the S&P 500 was off 1.27 percent. Futures for the tech-heavy Nasdaq Composite were lower 1.64 percent.

The benchmark U.S. S&P 500 index now looks likely to end down for the month for the first time since December and May could be the third worst month for U.S. stocks since the US credit rating downgrade in August 2011.

Shares of trade-dependent corporations, such as carmakers and semiconductor manufacturers, are likely to fall sharply.

Commerzbank analysts attributed Friday’s move to “selective perception” among traders fueled by general pessimism, which is pushing the market to focus on negative signals despite broadly robust economic fundamentals, according to Dow Jones.

“Market players are currently focusing only on demand worries while ignoring the fact that supply remains limited,” the analysts wrote in a note to clients.

Meanwhile, China is planning to restrict exports of rare earth minerals to the U.S. and may target specific American companies according to overnight media reports.  The trade war is already affecting Chinese economic growth with the official manufacturing purchasing managers index falling further into contraction below the 50 index level. The official NBS manufacturing PMI fell to 49.4 in May, from 50.1 in April.

The yield on the 10-year Treasury fell to 2.15 percent — its lowest level in 20 months — signaling investor interest in relatively safe securities. The price and yield of bonds move in opposite directions.

The 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.

Crude oil prices were down sharply: 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. It is on track to drop more than 11 percent in May, which would be its worst month since November 2018.

The Stoxx Europe 600 Index fell 1.4 percent Friday led by autos and basic resources 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.