Trump’s Mexican standoff rattles investors
A Mexican standoff is one in which there is no strategy
that exists that allows either side to gain victory. Donald Trump may take
Any hopes May would end on a high were dashed as the
White House slapped tariffs on all goods from Mexico. Tariffs of 5% will take
effect Jun 10th, and could rise to as much as 25% by October. The intent is to
ratchet pressure on Mexico to stop illegal immigration to the US.
Coming at a time of a breakdown in talks with China, it’s
another blow to bulls and we should consider further downside risks from
escalation. The worry is who’s next on Trump’s list – the EU may be next.
A fight with its neighbour and largest trading partner
was not on the agenda. With all eyes fixed on China, and with Nafta 2 agreed
and all apparently all hunky dory on the Mexico front, the caprice of Trump has
caught investors off guard and will weigh on investor sentiment.
Trump has weaponised trade and economic might of the US.
We have to assume that talks with China are going nowhere, and that this
therefore – in the absence of being able to find a new stick with which to beat
Beijing – is Trump finding a new ‘enemy’ to attack.
It’s early yet but following yesterday’s steadying of the
ship, futures in the US are off south again and a retest of the 200-day moving
average on the S&P 500 seems assured. Dow futures are printing a 24k handle
and are on course to close sharply lower for the month. Sell in May and go away
turns out to have been accurate this time. You’d have anyway wanted to see a
much firmer rally yesterday to suggest the bottom had been found.
Futures show European equities are retreating on this
fresh trade threat and it’s set to be a down day. FTSE 100 key support at 7150
and may well get taken out today.
FX: Peso hit
Needless to say the Mexican peso plunged on the news and
will now be sensitive to news flow on any escalation of tariffs, or likewise,
any detente. USDMXN has broken up through 19.64 and is trading very near
the highs of the year from Jan. Peso bears will have the 20 handle in their
Japanese auto stocks were hit as they use Mexico as base
to import to US. Mazda, Nissan, Toyota among the sharpest fallers. This is
likely to have some read across for European carmakers in today’s session.
Havens that had briefly retreated amid yesterday’s more
upbeat session, are once again bid. USDJPY has fallen through support to
find the 108 handle. Gold has rallied through $1294 even as the relative safety
of the dollar left greenback just a few pips from two-year highs.
GBPUSD has held the 1.26 handle but, having broken
through this level and below last week’s lows, the pound is now sensitive to
further downside squeezing as uncertainty over the next prime minister and the
direction of Brexit persists.
Overnight data is not helping risk today. China PMI
figures slipped to 49.4 against 49.9 expected, signalling contraction in
factory activity again. The PMI data suggests China is feeling the heat from
the trade war and tariffs. Caixin PMI is due Monday and May show an even
The whole picture is bearish for oil. Crude prices are at
three-month lows. US inventories yesterday showed a smaller than expected
drawdown at just -282k versus -860k expected. Stockpiles are at their highest
in two years. Speculative long positions continue to be cut. Supply uncertainty
is losing out to demand uncertainty. Simply put, with OPEC and co curbing
output, there is ample excess capacity in the market should it be needed, so
supply worries can be overstated. Traders are also betting Permian offtake
constraints will lessen as the year goes on. Copper’s also been slipping and is
retesting the Jan lows. Commodity markets are telling us there’s trouble in the
Uber losses hit $1bn but this was at the lower end of
guidance, whilst revenues came in at the top of the guided range at $3.1bn. Top
marks for that, but fundamental questions remain over top line growth in
Quarter on quarter bookings growth of a mere 3.4% is a
worry, and shows how tough this market is becoming. Costs rose 35% from a year
ago, whilst grids booking revenues were up 34%. Monthly active users jumped to
93m from 91m.
Nevertheless these were solid results in line
with management expectations, which should give investors some confidence