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Markets Reel as New Front in Trade War Makes a Bad Month Worse

In an attempt to curb illegal immigration, Trump attacks Mexico with tariff loaded guns

Markets Reel as New Front in Trade War Makes a Bad Month Worse
A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S.(Photographer: Michael Nagle/Bloomberg)

(Bloomberg) -- If there were any doubt about the “sell in May” adage for stocks, U.S. President Donald Trump put them to rest by announcing major tariffs on the second of his country’s top three trading partners.

Investors were first jolted in early May by a Sunday tweet from Trump announcing new duties on Chinese imports, upending expectations for a U.S.-China trade deal. The month ended Friday with the U.S. president turning his tariff gun to Mexico, for reasons extending beyond trade and economics -- illegal immigration.

“It’s not a war on trade anymore, the tariffs are now being used as a weapon for a lot of different issues he has with with various countries,” said Janu Chan, senior economist at St. George Bank in Sydney “It’s worrying because it’s quite impactful to global economies and global growth.”

Here’s how markets reacted:

Mexican Peso

Mexico’s currency slumped -- by as much as 2.3% -- its biggest one-day move since October. “That implosion in the Mexican peso, a major emerging-market currency, will ripple across other EM FX names,” said Kay Van-Petersen, strategist at Saxo Capital Markets Pte. He said the peso could breech 20 per dollar.

Markets Reel as New Front in Trade War Makes a Bad Month Worse

U.S. Stock Futures

S&P 500 Index futures were also hit. “Trump’s latest announcement just switched the dial back to risk-off,” said Jingyi Pan, a market strategist at IG Asia Pte. “It is a sign that the more confrontational foreign policy could extend to beyond China and perhaps is the last thing the market needs during such a fragile backdrop.”

Markets Reel as New Front in Trade War Makes a Bad Month Worse

Currency Havens

The dollar pushed higher, alongside the yen, as traders sought out traditional havens. “Emerging market currencies will probably lead losses, leading to buying of both the dollar and the yen,’’ said Kumiko Ishikawa, currency analyst at Sony Financial Holdings in Tokyo.

Markets Reel as New Front in Trade War Makes a Bad Month Worse

Treasuries

The surprise tariff moves extended the recent rally in U.S. Treasuries, with the 10-year yield dropping decisively below its 200-week moving average -- a key technical level. It traded at 2.17%, the lowest since September 2017, as of 6 a.m. in London. “The market response is likely to be negative as this doesn’t come at the best time, when month-end rebalancing and concerns over the softness in global economic activity have made investors cautious,’’ said Kerry Craig, global market strategist at JPMorgan Asset Management.

Markets Reel as New Front in Trade War Makes a Bad Month Worse


Japanese Automakers

Beyond the moves in broader macro asset classes, traders reacted quickly to the company-specific impact too. Japanese carmakers, which assemble vehicles in Mexico to sell in the U.S., tumbled. Mazda Motor Corp. slumped as much as 8.7%, dragging the shares to a six-year low. Nissan Motor Co. and Honda Motor Co. also fell.

Markets Reel as New Front in Trade War Makes a Bad Month Worse

--With assistance from Adam Haigh, Ruth Carson, Heejin Kim, Chikako Mogi, Joanna Ossinger and Jackie Edwards.

To contact the reporter on this story: Cormac Mullen in Tokyo at cmullen9@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Adam Haigh

©2019 Bloomberg L.P.