Europe

European markets had already been on course to post their first negative month this year, even before President Trump’s threat to impose tariffs on all Mexican imports, which pretty much came out of a clear blue sky.

It was just under two weeks ago that the US agreed with Canada and Mexico to remove all tariffs on aluminium and steel, in a move that is likely to bring forward the replacement of NAFTA, with the signing of USMCA.

The US also deferred escalations against the EU and Japan on auto tariffs which investors construed as the US administrations way of circling the wagons and focussing on, what was expected to be future relations with China, and the rising tension in the Arabian Gulf.

The events of the last 24 hours have blown all of that out of the water, and cast considerable doubt over the US administrations reliability and integrity as a trade partner.

If President Trump had wanted to send a message that the US administration was an unreliable actor then the threat to impose 5% tariffs on all Mexican imports, rising to 25% by October is terrible optics, at a time when US negotiators had just signed off the USMCA trade agreement.

It also throws open to question the integrity of any trade deal that is signed off in the future with China, and or the European Union. Whatever the US President’s gripes about immigration, using trade as a weapon in this fashion sends a terrible signal, and as such it is no surprise that financial markets have sold off hard, with the DAX hitting its lowest point since 1st April.

In any case the likelihood of a quick trade agreement looks further away than ever after China threatened to create its own blacklist of “unreliable entities” in the wake of the Huawei ban. In light of recent events, who could they possibly be thinking of?

The biggest fallers have been the usual suspects of the auto sector, while financials have also sold off on the back of sharp falls in bond yields.

As investors move out of stocks, bond markets have surged with German bund posting a record low yield of -0.2%. Unsurprisingly banks have also slid back with Deutsche Bank also hitting record lows in the share price. How long before it goes below €6? 

US

US markets have taken their cues from the sharp selloff in Europe, with the S&P500 opening below its 200-day MA for the first time since March. The Nasdaq has also come off hard, with chipmakers having a hard time of it.

US automakers have slid sharply, with Ford and GM a particular focus given that both companies have factories in Mexico. We have become all too familiar with the concept of non-tariff barriers and supply chains in respect of the UK’s relationship with the EU, and it’s a similar concept between the US and Mexico in terms of the ease of movement of spare parts and logistics on a cross border basis. 

Bond markets have rallied strongly with US 10-year yields below 2.2% and the 2-year yield below 2% for the first time since the beginning of 2018.

FX

The pound has continued to remain under pressure in the wake of the recent resignation of Prime Minister Theresa May, as it declines for the fourth week in succession. Next week she will step down from her position as PM and leader of the Conservative party, and thus firing the starting gun on the race for her replacement. The recent EU election results have done nothing to alleviate investor concerns over a no deal Brexit, which remains the current default position.

Even in the event of a new election, the current polling still suggests no coherent position that could carry a majority in the House of Commons, hence the current sterling weakness and ongoing uncertainty.

With President Trump due to visit the UK in the coming days, recent events are likely to make for a rather tense affair. Reports that the US could threaten to limit intelligence sharing over the UK government’s relationship with Huawei and 5G. This is unlikely to be particularly welcome given the UK’s current position with respect to its relationship with the EU, and could be used by the US President as leverage on any future trade relationship.

The Mexican peso dived to its lowest level this year in the wake of President Trump’s unexpected tweet grenade about the Mexican/US border, jumping briefly through the 19.80 level, last seen on the 27th December last year.

Commodities

Oil prices had already been on the decline even before President Trump’s salvo towards Mexico, and this has continued today. It is becoming abundantly clear that the ongoing trade tensions are likely to have a significant effect on the outlook for the global economy, with oil prices set to post their first monthly fall this year.

Gold prices on the other hand have only rebounded modestly and while they look set to close higher on the month, are still below their highs of earlier this month above $1,300.

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