MCF Weekly Capital Market Review - June 4th, 2019
Trade wars now seem to be a standard negotiating tactic for foreign policy. While the dispute with China remains unresolved, Trump now is targeting Mexico with an initial 5% tariff on all imports to the US The tariffs are slated to start June 10 with planned increases of 5% per month until reaching a 25% level. Two reasons for the new tariff threat are leverage in renegotiating the North American Free Trade Agreement (NAFTA) and a deterrent for the illegal immigration problem; both were signature Trump 2016 campaign promises that remain unfulfilled. It’s no coincidence that the announcement was made on the same day Trump’s renegotiated NAFTA was presented to Congress. The proposed tariffs have a chance of being revoked if Mexico cooperates enough on these two issues. As the 2020 presidential campaign approaches, Trump’s latest actions leave one with the impression that he means to fulfill these 2016 campaign promises.
The US has more bargaining power in both disputes due to the lopsided trade balance: the US imports more from both countries than it exports. The US-Mexico dispute is different for several reasons. Notably, ~75% of Mexican exports were to the US compared to Chinese exports of ~20% in 2018. Furthermore, exports comprised ~28% of Mexico’s GDP compared to ~4% of China’s GDP for the same year, . Tariffs have a higher economic impact on Mexico which may lead to a quicker resolution than the US-China dispute. However, political concerns may overshadow economic concerns in the negotiating process.
The S&P 500 spent the last week in a downward trend due to uncertainty of outcomes surrounding the aforementioned trade disputes. Ironically, emerging markets equities (MSCI EMI) were positive last week, although this likely is merely making up for some lost ground as it remains the worst performer QTD and YTD among other broad equity indices. Intermediate and long-term Treasury yields also came down with a 10-year yield of 2.14% at month’s end, further compressing yields (smaller difference between short-term and long-term yields). Oil (West Texas Intermediate) reached a low of $52.14, falling from its recent high of $63.81 on May 20, a drop of over 18% in just two weeks. From the fundamental side of the economy, the second estimate of real GDP for Q1 came in at 3.1%, slightly above the 3.0% consensus. Other indicators are showing signs of a pickup in inflation and strong labor markets.
This week has plenty of economic data releases to keep investors busy: PMI and ISM Manufacturing on Monday; Vehicle Sales and Factory Orders on Tuesday (Chairman Powell also speaks at the Conference on Monetary Policy Strategy on Tuesday); ADP Employment, ISM Non-Manufacturing, and the Beige Book on Wednesday; Trade, Jobless Claims, and Productivity on Thursday; and Employment Situation on Friday.
 “World Economic Outlook Database”. International Monetary Fund
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