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Stocks Close Lower as Trump's Mexico Tariff Threat Rattles Markets - The Wall Street Journal

Rising trade tensions sent stocks and bond yields around the world skidding Friday, capping a tough month for markets that caused the Dow industrials to notch their longest losing streak in nearly eight years.

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Major U.S. stock indexes lost more than 1% on Friday and closed the month of May down more than 6.5%, their worst monthly performance since December.

The Dow Jones Industrial Average slid 354.84 points, or 1.4%, to 24815.04, capping its sixth consecutive week of losses, the longest weekly losing streak since June 2011. The S&P 500 fell 36.80 points, or 1.3%, to 2752.06 while the Nasdaq Composite lost 114.57 points, or 1.5%, to 7453.15. All three indexes remain up for the year, though gains have shrunk, with the Dow industrials now only up 6.4% in 2019.

Investor unease also rippled across the bond market. The yield on 10-year U.S. Treasurys fell sharply to 2.139%, marking its largest one-month yield decline since 2015. As concerns about economic growth build, yields have dropped to their lowest level since September 2017.

At the heart of May’s stock and bond-yield drop: The fear that the U.S. economy’s nearly decadelong expansion--which in July will become the longest on record--may be nearing an end. While few analysts anticipate an imminent recession, many worry that economic growth could stumble as companies rein in spending and higher tariffs around the world hurt sales.

Gold, a haven investors tend to put money in when they’re worried about the economy, rose to $1,305.80 a troy ounce, up 1.8% in May, its biggest monthly gain since January. Yields on German 10-year bunds fell to negative 0.201%, an all-time low.

Investors fled riskier assets after President Trump threatened to impose escalating tariffs on Mexico, a move investors fear could hurt corporate earnings, increase prices for U.S. consumers and crimp economic growth. The Mexican peso fell 2.5% against the dollar, while the Japanese yen, typically perceived as safer, gained.

Mr. Trump said late Thursday that the U.S. would impose escalating tariffs on its southern neighbor starting June 10, unless the country takes action to deter the flow of Central American migrants passing through its borders. The levies could hit 25% by October if Mexico fails to satisfy the White House’s demands.

“This will impact consumer spending. This will impact corporate earnings. This is utilizing a trade policy tool to enforce policy outside of trade, and that sets a concerning precedent and leaves investors wondering how else tariffs could possibly be used,” said Kristina Hooper, chief global market strategist at Invesco. “Markets were already freaking out over existing tariffs. We’ve just thrown gas on the fire.”

It is the latest in mounting trade tensions. Through Friday, the administration has imposed 25% tariffs on roughly $250 billion of Chinese imports. It has threatened to add even more goods to its tariff lists.

After a choppy end to 2018, the S&P 500 had climbed to fresh records this year on optimism that a trade deal between the U.S. and China would be struck.

Then, in early May, those hopes quickly faded after Mr. Trump threatened to raise tariffs on Chinese imports.

The higher tariffs have hurt stocks in recent weeks, from retailers hit with higher costs on imported goods, to manufacturers that import steel and aluminum from China to technology companies facing weaker sales in a coveted market. Energy companies also tumbled in May, as concerns about trade policy and slowdown in the Chinese economy drove the price of oil down 16% to its lowest level since February.

Bank shares are getting a double hit. Falling interest rates narrow the gap between what banks charge borrowers and what they pay depositors, so lower yields are pressuring shares of big banks. Furthermore, bank performance tends to be a reflection of the economy, as banks do well when companies and consumers are spending freely and taking out big loans. Higher tariffs threaten to curb that spending. The KBW Nasdaq Bank Index shed 1.7% Friday, putting its monthly loss at 10%.

Shares of auto makers and their suppliers, which are highly exposed to trade fluctuations, also fell more Friday. General Motors and Ford drops put their monthly declines at 14% and 8.9%, respectively.

Both companies have extensive manufacturing footprints in Mexico and rely on a network of suppliers that transport raw materials and semifinished products across the border. They also import parts from China.

Among the stocks that have been hit particularly hard by the tariff news was Constellation Brands, maker of Corona and Modelo beers. Shares fell 5.8%, while Kansas City Southern, which operates a railroad that extends into Mexico, dropped 4.5%.

U.S. markets weren’t alone in their May declines. The Stoxx Europe 600 lost 5.7% during the month, its biggest drop since January 2016. The Hang Seng fell more than 9% in May, while the Shanghai Composite lost 5.8%, marking both of their biggest one-month drops since October.

Companies whose businesses are exposed to trade with Mexico were hit in markets Friday. Here, trucks line up to cross into the U.S. from Tijuana, Mexico. Photo: joebeth terriquez/Shutterstock

Some analysts cautioned that the coming weeks and months could bring additional volatility.

Using tariffs to influence migration policy shows the White House is prepared to use trade to gain leverage outside of the economic sphere, Martin Moeller, co-head of Swiss and global equity at Union Bancaire Privée said. He suggested the next target could be NATO members that refuse to raise military spending in line with U.S. demands.

“If a NATO member isn’t complying, tariffs could be also used as a weapon against such a country,” he said.

Write to Corrie Driebusch at corrie.driebusch@wsj.com

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https://www.wsj.com/articles/global-stocks-and-bond-yields-drop-on-mexico-tariff-concerns-11559289992

2019-05-31 22:11:00Z
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