Associated Press President Donald Trump talks with reporters before departing on Marine One for the Air Force Academy graduation ceremony, Thursday, May 30, 2019, in Washington. (AP Photo/Evan Vucci)
- Stock markets around the world were thrown into disarray Friday after President Donald Trump unexpectedly announced he planned to impose tariffs on US-bound goods from Mexico.
- Strategists and economists think the worst is yet to come.
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Investors already on edge from the ongoing trade war between the US and China are dealing with a new headache.
Financial markets were thrown into disarray on Friday after President Donald Trump threatened to impose tariffs, starting June 10, on all the goods the US imports from Mexico until the "illegal immigration problem is remedied."
Global equities plunged. The Mexican peso cratered. Germany's 10-year Bund yield scraped to the deepest below zero on record low. The VIX, the S&P 500's "fear gauge," touched a two-week high. And strategists, economists, and analysts up and down Wall Street warned the worst is yet to come.
"So this is no more about free and fair trade, reciprocity, and protection of technological expertise," Peter Boockvar, the chief investment officer at Bleakley Advisory Group, said Friday in an emailed report he called "Serenity Now."
"Tariffs can be thrown around as an economic bomb for anything now," he said. "Global growth rates will only continue to suffer."
The Trump administration's sudden announcement comes as Washington and Beijing are locked in their own trade dispute that has been dragging on for over a year. Experts say the duties Trump is threatening could heavily impact supply chains between the US and Mexico - and inject a new wild card into equity markets.
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"Despite a less severe impact on GDP, the impact on supply chains and economic activity could be significant, implying that financial markets could be affected materially," Nomura research analysts led by Lewis Alexander said in a note out Thursday.
Automobiles and capital goods are two groups particularly sensitive to the proposed tariffs as they accounted for most of the US's imports from Mexico last year, the analysts said. Auto stocks like General Motors and Ford slid on Friday, and a team of Deutsche Bank economists said the anticipated costs for US automakers would be "crippling."
"With businesses already grappling with the ramp up in US-China trade tensions, further uncertainty created by tonight's announcement could amplify a decline in business confidence," they wrote.
Nomura.
US goods imports from Mexico by type of product in 2018, per Nomura.
The development knocked down equity markets, at least in the US, that were already in the midst of a dismal run. May marked the first negative month of 2019, and the Dow Jones Industrial Average fell for a sixth-straight week.
The S&P 500's "large topping pattern remains in effect, which, after the latest Tariff news on Mexico, has a chance of playing out further now," said Frank Cappelleri, the chief market technician at Instinet, told clients Friday.
He added in a note out early Friday called "Mayhem" that the S&P 500 has "decidedly broken down," with a downside target of 2,650. The benchmark index has already fallen 7% from its May 1 high, and that would mean a drop of another 3.6% from here.
Still, the question remains whether Trump's announcement is a negotiating tactic or whether the proposed tariffs will be implemented on June 10.
"Could the threat of monthly escalating tariffs on Mexico be a negotiating ploy? Certainly," Sam Rines, the chief economist at Avalon Advisors, told clients on Friday.
"That might even be the most probable outcome of the threat. But - even if it is just a negotiating ploy - it is not something that can be ignored. The threat creates incremental uncertainty, further crippling already flagging business investment."
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