Briefing highlights
- ‘Tariff trauma’
- Manufacturing gloom spreads
- Stocks, loonie, oil at a glance
- Required Reading
‘Tariff trauma’
Bank of Montreal's chief economist summed it up well: "The market's wall of worry just turned into Mount Everest, amid climbing trade tensions."
Douglas Porter was referring to the “tariff trauma” reaction to U.S. President Donald Trump’s spreading trade wars, which threaten to escalate this week and further ripple through markets.
First there's the ongoing dispute with China, with Washington and Beijing trading volleys and with no end in sight to the tariff war.
Then, late last week, Mr. Trump lobbed a surprise into the markets, saying he will slap 5-per-cent tariffs on Mexican goods on June 10, and increase the level to 25 per cent in October if Mexico doesn't deal with illegal migration at its border.
Among the many potential ramifications of Mr. Trump's threat is the delay of the new U.S.-Mexico-Canada trade agreement, or USMCA, which still has to be approved by the three governments.
“Seemingly unafraid to further inflame markets, or to trample every conventional diplomatic norm, or to threaten the fragile path for USMCA approval, the President’s tariff threat was aimed at border security – far removed from any trade issue,” Mr. Porter said.
“Having well learned not to dismiss the administration’s threats on trade – no matter how outlandish the bluster – markets are selling first, and will ask questions later.”
Mexico’s Economy Minister Graciela Marquez and U.S. Commerce Secretary Wilbur Ross are meeting to discuss the situation today.
There will be further fallout as the administration fights both Mexico and China, and, possibly down the road, Europe and Japan over their auto exports.
"These [Mexico] tariffs, alongside prolonged Chinese negotiations, complicate trade relations even further, said Toronto-Dominion Bank economist Shernette McLeod.
"The heightened bout of uncertainty is likely to dent already shaky business confidence."
U.S. President Donald TrumpKevin Lamarque/Reuters
JPMorgan Chase analysts agreed, warning the U.S.-China fight is already "starting to pollute" certain readings of business confidence.
“Trump’s bombshell decision to impose tariffs of 5 per cent, potentially rising to 25 per cent, on Mexican imports unless Mexico steps up its efforts to curb illegal migration could not have been worse timed for risk markets as it signals that the administration regards tariffs as a highly effective tool to achieve not only economic goals but also broader policy objectives,” Paul Meggyesi, JPMorgan currency strategist, and his colleague Patrick Locke, said in a report.
"This latest deployment of tariffs is specifically negative for Mexico, obviously, but it also risks reinforcing the more bearish global narrative if investors conclude that the administration is becoming trigger-happy towards the use of tariffs and so could escalate not only against China but eventually also extend economic tariffs to European and Japanese auto imports."
How Mexico solves this crisis is a big question.
"With Mexico far more dependent than China on trade with the U.S., we’d expect talks to result in at least some concessions," said Paul Ashworth, chief U.S. economist at Capital Economics.
"But Trump’s threat to impose tariffs until the flow of migrants to the southern border is 'substantially stopped' is so vague, we have no idea of what concessions he would settle for. As with the China dispute, we’d be wary of dismissing the risks of a damaging outcome."
Read more
- Tim Shufelt, Eric Atkins, Nicolas Van Praet: Trump’s plan to hit Mexico with tariffs threatens industrial trade, sends markets tumbling
- Trump doubles down on Mexico threats ahead of tariff talks
- Mexico’s President urges Trump to back down from tariff threat, calls on country to unite
- Trump vows rapid increase in tariffs on Mexico unless illegal immigration ends
- Trump vows rapid increase in tariffs on Mexico unless illegal immigration ends
Manufacturing gloom
Investors are also fretting over the latest batch of manufacturing readings, some of which show weakness that threatens global economic growth.
Purchasing managers index readings are pouring in from around the world, one measure for the euro zone coming in at 47.7, below the 50 mark that separates manufacturing expansion from contraction.
“The U.K. is once again under pressure, as the benefits of a weakening pound fail to maintain growth within the manufacturing sector,” said IG chief market analyst Joshua Mahony.
“Today’s sharp decline in the manufacturing PMI highlights the impact of previous no-deal stockpiling, with new business harder to come by in this Brexit lull.”
And in the U.S., the key ISM reading slipped to 52.1, still in expansion territory but below what was expected and the lowest in 2 ½ years.
“After months of appearing immune to the challenges facing global manufacturing, U.S. factory activity finally seems to be cooling, hampered by a build-up in inventory, weaker external demand and trade uncertainties,” said National Bank of Canada economist Jocelyn Paquet.
“The weakness of the manufacturing sector highlights the need for de-escalation in the trade dispute opposing the U.S. and China.”
A different, second measure showed manufacturing in China just keeping its head above water, the Caixin PMI coming in at 50.2.
“The continued weakness in China’s activity surveys reinforces our view that economic growth is likely to soften this quarter and increases the likelihood of additional policy easing in the coming months,” said senior economist Shilan Shah and assistant economist Franziska Palmas of Capital Economics, noting the measure was slightly better than expected.
“But even so, the reading is hardly anything to write home about,” they said in their report. “What’s more, the official manufacturing PMI, which was published on Friday, fell sharply to one of its lowest levels in the past three years.”
Read more
Markets at a glance
Read more
Required Reading
Cannabis company payout
Four weeks after reporting a writedown worth nearly US$500-million, cannabis company Tilt Holdings Inc. disclosed it paid senior executives and board members US$60-million, mostly in stock options, Tim Kiladze writes.
Ottawa aims for credits via LNG exports
Ottawa wants to use a provision in the Paris climate accord in hopes of gaining emissions credits toward meeting Canada’s targets by helping to reduce air pollution in Asia. Brent Jang reports.
Cogeco seeks ‘middle ground’
As Canada’s telecom regulator considers new ways to promote competition in the wireless market, Cogeco Communications Inc. is pitching a “middle-ground” model to help it crack into the industry. Telecom writer Christine Dobby reports.
Where to turn?
Where can investors turn as market jitters grow? Ian McGugan looks at what history tells us.