Friday, May 31, 2019

Markets dive as Trump's tariffs threaten global growth

Dow sank 354 (closing at the lows), decliners over advancers 5-2 & NAZ slumped 114.  The MLP index was off 1+ to the 243s.  Junk bond funds were sold & Treasuries continued in heavy demand.  Oil tumbled to the 53s & gold surged 18 to 1310 (more on both below).

AMJ (Alerian MLP Index tracking fund)

Live 24 hours gold chart [Kitco Inc.]

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The Trump administration is ramping up pressure on House Speaker Nancy Pelosi to take up a new trade deal between the US, Canada & Mexico, but fresh tariffs on Mexico could further complicate a process already mired by a bitterly divisive political environment in DC.  Outside of the future of the US–Mexico–Canada Agreement (USMCA) which is designed to replace NAFTA, the new duties could also impact ongoing trade negotiations with China & lead to higher consumer prices, particularly if the White House scales the tariffs at the pace it forecasted.  The administration is hoping the latest trade threat will force Mexico to take action to curb the crossing of undocumented individuals into the US, though it has largely avoided providing any specific metrics.  Should the demands not be met, the 5% tariffs beginning on Jun 10 would rise to 15% on Aug 1, 20% on Sep 1 &, ultimately, 25% on Oct 1.  Combined with the existing tariffs on $250B in Chinese goods, as well as the potential that administration imposes duties on another $300B , by Oct the US could have a 25% tax on nearly $900B in goods from China & Mexico, 2 of the country's largest trading partners.  Domestic firms would have difficulty importing the products they need from elsewhere if double-digit tariffs are imposed on both Canada & Mexico, given the other large US trading partners – including Canada, the UK & Japan – are insufficient substitutes.  That would likely mean higher prices for consumers, as businesses seek to mitigate the impact on their own operations.  In a sign of the significance of the action, the tariffs drew near nearly unanimous backlash from industry groups.

Trump’s Mexico tariffs draw immediate rebuke, threaten USMCA deal and China trade talks

Consumer spending slowed in Apr while inflation was up, but still far below the target set by the Federal Reserve.  The Commerce Dept said that spending increased 0.3% in Apr following a 1.1% surge in Mar that had been the largest increase in nearly a decade.  Personal income growth, which had been lagging in recent months, jumped 0.5% in Apr.  Inflation, as measured by a gauge tied to consumer spending, increased 1.5% in Apr compared with a year ago, up slightly from a 1.4% 12-month change in Apr.  The Fed tries to manage interest rate policy to achieve annual price gains of 2%.  However, in the first 3 months of this year, inflation fell farther from this goal.  Pres Trump has argued that the slowdown in inflation shows that the Fed is keeping monetary policy too tight & should start cutting interest rates.  The Fed raised rates 4 times last year but then reversed course in Jan & has signaled that it plans to keep rates unchanged this year.  However, Trump has argued that Fed policies are hurting the economy & the central bank should be slashing rates instead of keeping them steady.  Fed Chairman Jerome Powell & other Fed officials have attributed the slowdown in inflation to temporary factors which should reverse in coming months & have argued that the Fed's wait-&-see approach on further changes in interest rates is appropriate given how low unemployment is currently.  The 0.5% gain in incomes followed 3 months of tiny changes & was the best showing since a 0.9% jump in Dec.  With incomes rising faster than spending, the saving rate increased to 6.2% of after-tax income in Apr, up from 6.1% last Apr.  The gov reported yesterday that the overall economy, GDP, grew at a solid 3.1% rate in Q1.  But ½ of that gain was based on temporary factors that are expected to fade in the current qtr.  Economists believe that consumer spending, which accounts for 70% of economic activity, will rebound this qtr after slowing in Q1 but they still think overall GDP will slow to a growth rate of around 1.5%.  For Apr, spending on durable goods such as autos fell 0.8% after a 3.6% jump in Mar, while spending on nondurable goods such as food & clothing rose 0.7%.  Spending on services such as utilities & doctor visits rose 0.3%.

US consumer spending slows to 0.3% gain in April

US household sentiment fell at the end of May from earlier in the month as consumers worried about renewed trade tensions.  The University of Michigan said its final index of May consumer sentiment index was 100, up from 97.2 in Apr but down from May's initial estimate of 102.4.  The forecast called for a final reading of 101.

U.S. Consumer Sentiment Dropped in May

Oil prices slumped to a 3-month low as concerns about Pres trump's trade policy & the slowdown in the Chinese economy cast doubt on the outlook for global demand.  Front-month Brent crude futures, the intl benchmark, traded down 2.6% at $63.60, having earlier dipped to their lowest level since mid-Feb.  US benchmark WTI dropped 2.4% to $55.25, its lowest price since early Mar.  The steep declines came alongside a broad retreat in riskier assets after Pres Trump announced a plan to impose escalating tariffs on Mexican imports starting Jun 10.  The US is a major importer of Mexican crude, & refineries relying on the supply could face difficulties replacing it once tariffs are imposed.  Adding to the gloom was disappointing manufacturing data in China, which raised concerns that Beijing's efforts to rejuvenate growth are faltering in the face of trade tensions with the US.  The combination of US sanctions on Venezuela & Iran, along with tariffs on Chinese & Mexican goods, is harming investor confidence in the global economy, analysts said.  The latest price fall completes a torrid month for oil markets.  Brent lost more than 11% in May, which would be its worst single month since Nov.  Energy prices made a strong start to 2019 as major producers cut back output, but fears that trade frictions & a downturn in the world economy will hit demand have sent prices spiraling lower in recent weeks.  Global oil supplies fell by 300K barrels a day in Apr, according to the most recent report by the International Energy Agency, partly driven by declining output in Iran.  In the US, the Energy Information Administration reported yesterday that inventories of crude oil fell slightly last week, though the decline wasn't as much as expected.

Crude oil prices tumble to 3-month low

Gold prices surged, advancing to their highest level since early Apr with fears about a slowing economy pushing some investors toward safer assets & the $ declining.  Gold for Jul delivery, the most-active futures contract, rose 1.4% to $1311 a troy ounce.   Despite recent stock-market volatility, prices are only slightly higher for the month & year with many analysts preferring the safety of Treasuries & the $.

Gold Hits Highest Point Since Early April

This was an usually dreary day for stocks.  Trump's surprise announcement about new tariffs on Mexico caught investors by surprise.  Stocks were sold at the opening & the bulls stayed away all day.  The Dow closed at its low, finishing the month down 1800.  Worse, the outlook is for more selling with so much nervousness about global growth, beginning with the US economy.  Until the trade scene calms, selling will continue in stocks.

Dow Jones Industrials


Markets plunge after Trump announces new Mexican tariffs

Dow tumbled 275, decliners over advancers better than 3-1 & NAZ sank 85.  The MLP index was flattish in the 244s.  Junk bond funds declined & Treasuries were purchased aggressively, taking the yield on the 10 year Treasury under 2.17%.  Oil dropped 1+ to the 55s & gold jumped up 15 to 1307.

AMJ (Alerian MLP Index tracking fund)

CL=FCrude Oil55.001-1.59-2.8%

GC=FGold   1,301.40

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Stocks opened sharply lower with investors fearing that Pres Trump's surprise decision yesterday to impose tariffs on all Mexican imports, combined with the trade war with China, risks slowing economic growth.  The US will impose a 5% tariff on incoming Mexican products until the country limits illegal immigration on the US southern border,  Trump announced last night.  The tariff will go into effect on Jun & Trump threatened to raise it further “until the Illegal Immigration problem” is resolved.  On Jul 1 the tariff could rise to 10%, on Aug 1 it could rise to 15% & on Oct 1 it could climb to 25%.  The benchmark U.S. S&P 500 index now looks likely to end down for the month for the first time since Dec & May could be the 3rd worst month for stocks since the US credit rating downgrade in Aug 2011.  Meanwhile, China is planning to restrict exports of rare earth minerals to the US & may target specific American companies.  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.  The official NBS manufacturing PMI fell to 49.4 in May, from 50.1 in Apr.  The yield on the 10-year Treasury fell to 2.15%, a new low.  The market is currently pricing-in 3 Federal Reserve interest rate cuts by the end of next year, with Vice Chairman Richard Clarida yesterday suggesting the central bank would be open to reducing rates if economic growth slows & inflation falls.  But the inflation measure closely watched by the Fed, personal consumption expenditures price index, rose in Apr for the first time this year in data published today.  The PCE index was up 0.2% for the month & 1.6% annually, the Commerce Dept said.  The Stoxx Europe 600 Index fell 1.4% led by autos & basic resources with European shares set for largest monthly drop since Jan 2016.  China's Shanghai Composite closed down 0.2%, the Hang Seng was off 0.8% & Japan's Nikkei 225 ended lower 1.6%.  Crude oil prices were down sharply: West Texas Intermediate, the US benchmark, tumbled 2.3% to $55.27 per barrel & Brent crude oil, the European benchmark, dropped 2.3% to $63.82 a barrel.  Crude oil prices are down 11% in May, the biggest monthly fall since last Nov.

Stocks and bond yields tumble after Trump hits Mexico with tariffs

Mexico Pres Andrés Manuel López Obrador says Mexico won't respond to Pres Trump's threat of coercive tariffs with desperation but instead will push for dialogue.  López Obrador says he has dispatched Foreign Affairs Secretary Marcelo Ebrard to DC to show Trump data that Mexico has been taking action to slow illegal immigration.  Trump threatened yesterday to impose tariffs starting at 5% & increasing incrementally if Mexico does not convince him that it's doing more against illegal immigration.  López Obrador said the Mexican people "don't deserve this kind of treatment."  He noted that most migrants passing through Mexico are Central Americans fleeing their countries because they are unable to find work or live safely there.  He says Mexico will not commit human rights violations.  Today, Trump fired back with an additional Tweet, saying "Mexico makes a FORTUNE from the U.S.....and time for them to finally do what must be done!"

Mexico President: Won't act desperate after Trump's tariff threat

Amid heightened tensions over trade & technology, Huawei has told employees to cancel select meetings with contacts in the US.  According to the Financial Times, citing Huawei's chief strategy architect, Dang Wenshuan, Americans employed in research & development were repatriated earlier in May by the technology giant.  That came after the Chinese group & close to 70 affiliates were put on a trade blacklist.  A workshop reportedly underway at the time was "hastily disbanded, and American delegates were asked to remove their laptops, isolate their networks and leave the Huawei premises."   The Financial Times quoted Dang as saying Huawei is also limiting interactions between its employees & American citizens.  “We don’t know what will happen . . . We don’t know the boundary of the law, we have to be whiter than white,” he added.  The report follows a contentious back-&-forth between the US & China ahead of a potential full trade war.  The Trump administration initially refrained from labeling the Chinese technology giant as a security issue, instead, arguing it was more of a trade concern.  But with no signs of the trade tensions waning, the pres became more forceful.  “Huawei is something that’s very dangerous,” Trump said.  “You look at what [they've] done from a security standpoint, from a military standpoint, it’s very dangerous.”  Earlier this month, the White House announced an exec order authorizing the Commerce Dept to restrict US companies from doing business with telecom firms that pose a national security risk.

Huawei tells staff to cancel meetings with US contacts amid trade tensions: report

China said it will establish a list of so-called unreliable entities of foreign companies & people that “seriously damage” the interests of domestic firms.  “Foreign enterprises, organizations and individuals that do not comply with market rules, violate the spirit of contract, block or cut supplies to Chinese firms with non-commercial purposes, and seriously damage the legitimate rights and interests of Chinese enterprises, will be added to the list of unreliable entities,” Gao Feng, a spokesperson with the Ministry of Commerce said.  He added detailed measures will be announced soon.  While the announcement didn't mention any specific country or company, it came at the height of the ongoing trade war with the US which escalated after Pres Trump blacklisted Chinese telecom giant Huawei, halting its ability to purchase American chips.  The world's 2 largest economies have been jockeying for tit-for-tat strategies after the trade talks fell thru earlier this month.  In a recent move, China reportedly stopped purchases of US soybeans & threatened to cut off rare earth supply to the US.  Both sides have slapped more tariffs on each other's goods in May.  The tariffs on $60B in US goods in retaliation for the higher duties on $200B worth of Chinese products will kick in tomorrow.

China is establishing an ‘unreliable entities’ list that will include companies and people

The new tariffs on Mexican imports were a surprise to investors & they are not taking the news well.  There was heavy selling at the opening & buyers are staying home.  Today is already virtually guaranteed to be a bad day for stocks which will make it the worst May since 2010.  Frightened money is being invested in gold & Treasuries as trade prospects become gloomy.

Dow Jones Industrials