Friday, May 31, 2019

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

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