Stocks declined for the 4th straight week impacted by rising trade tensions and continued geopolitical uncertainty. With the White House announcing that the U.S. will impose tariffs on Mexico in order to quell illegal entry, concerns increased on unresolved U.S.-China trade issues. These have a serious impact on global growth. May showed the largest stock market pullback this year, but in counterpoint, bonds rallied significantly. Overall, both the U.S. and global yields showed declines; the 10-year Treasury ended at its lowest point in 21 months at just 2.13%. German yields followed suit moving into negative territory.
The leading US economic news surrounded the proposed tariffs on all imports from Mexico in a bid to force Mexico to deal with its illegal immigration problem. It’s hard to tell if higher tariffs on China and Mexico are short-term tactics aiming to spur on specific actions, or they are more long-term strategies that could stay in place after any goal is achieved. Both of those things have occurred in past tariff bouts. Higher tariffs on U.S. imports generally lead to higher prices in the U.S. and slower economic growth for the countries involved. But the impacts are also typically small when compared to the overall U.S. economy. Most analyst are still looking at economic growth to continue at 2% to 2.5% in 2019. That’s thanks to strong job numbers, slowly rising wages, low inflation, low interest rates and aggressive fiscal policy.
Tariffs on Mexican Imports
The surprise tariff increase on Mexican imports is a 5% tariff slated to begin June 10 and to increase monthly to cap at 25%. The plan is to pressure Mexico over its inaction in dealing with stopping illegal immigration flows to the U.S. Leading imports from Mexico include autos and electronics, with the overall import figure at about $350 billion. Stocks in the leading sectors declined in response. It’s hard to tell if these tariffs will prompt a response from Mexico, but most analysts don’t expect tariffs to rise to 25% on imports from Mexico. However, ongoing threats of higher tariffs and trade disruptions are expected to add to stock market volatility.
Metals and Mining
The gold market is living up to its potential as a safe-haven asset this week with prices pushing back above $1,300 an ounce. Gold is seen as attractive because it is considered one of the cheapest safe-haven assets out of all the financial markets. The U.S. dollar index has struggled to hold gains above 98 points, but it continues to trade near a two-year high. Meanwhile, the U.S. 10-year bond yields are trading at around 2.16%. The inverse is true for gold, which is trading at a two-week high. The August gold futures last traded at $1,309.20 an ounce. That is up over 1% from last week. Geopolitical tensions always come to bear on the metals markets, and especially gold. Some analysts think they have reached a tipping point with President Donald Trump adding a 5% tariff on Mexico in his efforts to halt illegal immigration into the U.S.
Energy and Oil
U.S. oil futures dropped by more than 5% on Friday to settle at their lowest since February as another market saw affects of the Trump administration’s plans for tariffs on Mexican goods. The concern is that the tariffs may affect economic growth and therefore, energy demand. Overall, energy shares performed worst for the second consecutive week as domestic oil prices tumbled to their lowest level since February. The prices were dragged lower by a smaller-than-expected decline in U.S. crude inventories. In a move not widely reported, the Trump administration has decided to approve expanded use of ethanol fuel. That is expected to help corn farmers hurt by the trade conflict with China. According to data from PointLogic Energy, the average total supply of natural gas rose by 1% compared with the previous week. Dry natural gas production grew by 1% compared with the previous report. Average net imports from Canada were down 2% from last week.
This week, both the U.S.-China trade tensions and President Trump’s new plan to impose tariffs on Mexico pushed equity markets in Europe down as investors moved to lessen risk. The pan-European STOXX Europe 600 fell about 2%, the UK’s FTSE 100 lost about 1.6%, and the export-heavy German DAX index dropped 2.4%. Tensions are increasing in Italy between the euroskeptic government and the European Union (EU). As a sign, the FTSE MIB Index lost almost 3%. Investors sold Italian government debt likely due to growing fears of a showdown between Rome and Brussels over Italy’s high debt levels. Over the week, the benchmark Shanghai Composite Index added 1.6%, and the large-cap CSI 300 Index added just under 1%. The CSI 300 is notable as it tracks all bluechip stocks listed on the Shanghai and Shenzhen exchanges.
The Week Ahead
There’s plenty of economic data to watch this week: the Manufacturing Purchasing Managers’ Index comes out, along with auto sales and construction spending from the month of May. A bigger factor will be May’s jobs report, which will be released this week, with most market watchers and economist expecting the unemployment rate to stay right in line with the cyclical lows.
Key Topics to Watch
• Mexican Tariffs by the US
• China Trade War with the US
• ADP National Employment Report
• U.S. International Trade in Goods & Services Report
• ISM Manufacturing Report on Business
• Revised Productivity & Costs
Markets Index Wrap Up