(Reuters) – U.S. stock indexes were set to tumble at open on Friday, hit by fears that President Donald Trump’s shock threat of tariffs on Mexico could prove the trigger that pushes the world’s largest economy into recession.
FILE PHOTO: Traders work on the floor at the New York Stock Exchange (NYSE) in New York, U.S., May 20, 2019. REUTERS/Brendan McDermid
The United States will impose a 5% tariff on all goods coming from Mexico starting on June 10 until illegal immigration is stopped, Trump said in a tweet late on Thursday. Mexican President Andres Manuel Lopez Obrador said he would respond with “great prudence”.
That shocked global financial markets on Friday and futures pointed to falls of 1 percent or more for all of Wall Street’s major indexes, with carmakers and manufacturers bearing the brunt of the damage.
“It is a very sticky situation,” said Art Hogan, chief market strategist at National Securities in New York.
“American companies needed to find supply chains outside of China when it looked like the (U.S.-China) trade deal is going to take much longer and one of those countries that was pointed to outside the pacific was Mexico.”
Wall Street is on course for an almost 6% fall in May, its worst performance this year and the trigger for a flood of money into the bond market that has encouraged expectations of a U.S. recession.
Adding to risks was Beijing’s warning on Friday that it would unveil an unprecedented hit-list of “unreliable” foreign firms in retaliation for U.S. tariffs.
U.S. Treasury yields fell to new multi-month lows, while the yield curve, as measured in the gap between three-month and 10-year bond yields, remained heavily inverted. An inversion in the yield curve is seen by some as an indicator that a recession is likely in one to two years.
U.S. automakers were the worst hit from Trump’s announcement as they have long built vehicles in Mexico, taking advantage of the country’s cheap labor, trade deals and proximity to the United States.
Shares of General Motors Co slid 4.7%, while those of Ford Motor Co fell 3.4%.
Tariff-sensitive industrial bellwether Boeing Co dropped 1.1% and Caterpillar Inc declined 1.3%.
FAANG stocks – Facebook Inc, Apple Inc, Alphabet Inc, Netflix Inc and Amazon.com Inc – were also down between 1% and 1.5%.
At 8:52 a.m. ET, Dow e-minis were down 249 points, or 0.99%. S&P 500 e-minis were down 28.75 points, or 1.03% and Nasdaq 100 e-minis were down 88.25 points, or 1.22%.
Data showed U.S. consumer prices increased in April, which could support the Federal Reserve’s contention that recent low inflation readings were transitory and allow the central bank to keep interest rates unchanged for a while.
The Commerce Department said its core personal consumption expenditures (PCE), the Fed’s preferred inflation measure that excludes volatile food and energy components, gained 0.2% last month after edging up 0.1% in March.
Among other stocks, Gap Inc tumbled 14.3% after the apparel retailer cut its 2019 profit forecast.
Constellation Brands, which has substantial brewery operations in Mexico, slid 7.1%.
Reporting by Shreyashi Sanyal and Medha Singh in Bengaluru; Editing by Anil D’Silva