Markets Poised to Open Lower After Mexican Tariff Shock

Alan Penny

31 May 2019

2 min read

The Dow Jones is set for a negative open of more than 270 points on Friday. Nasdaq and S&P 500 are also following suit with a negative opening. This is in response to an announcement on Thursday evening that the US would be placing a 5% tariff on all Mexican imports from June 10th. This tariff it says will remain in place until the problem of illegal immigration at the southern border is solved.

Possibility of Tariff Increase in Future

As well as imposing the 5% tariff, the White House has added the possibility that these tariffs could be raised. This would happen if Mexico did not take sufficient action to curb illegal immigration at the border they say.

The proposed rate of increase in the Mexican tariff would be 5% per month until October 1st. At that time the tariff will have reached 25%. It is not yet clear how Mexico plans to respond to the newly imposed tariffs. An increase of this scale in the coming months is likely to heap the pressure on a number of companies, Mexican industries, and even US companies who possess manufacturing facilities south of the border.

Dow Jones Futures - May 31st

Dow Jones Futures – May 31st

Domestic and International Impact to be Felt

While domestic Mexican imports such as agricultural produce will certainly be impacted by the tariffs imposed, this impact stretches to include many US and global companies. US companies such as Ford and GM rely heavily on low-cost operations in Mexico. This will surely transpire to having a negative effect on the US domestic economy over time.

As a reflection of the international impact, share prices in the Japanese carmakers Toyota, Mazda, and Nissan all fell as much as 7% on the announcement. All of the firms possess manufacturing facilities in Mexico.

The latest move is one which the Trump administration had threatened for some time. It falls in line with their tough global stance on trade during the current period. Addressing what they see as trade imbalances around the world with such strong actions though, may very well lead to negative results for the domestic economy. The heavy falls on Friday being an indication of such.

Global Trade War Intensifies

The Mexican tariffs are the latest in a collection of recent events that point to a ramping up of the US war on trade around the world. Earlier in the week, Beijing had warned the US not to test their resolve. They threatened to cut off access to vital rare earth minerals. The Chinese foreign minister went as far as to accuse the US of economic terrorism.

With the 10-year US treasury yield also falling to 24-month lows, it is possible that the US economy could suffer from what is fast creating a very negative market sentiment. The fear around the market will be exhibited when major indices open on Friday. Whether or not they can recover to close out the week strongly remains to be seen.

Written By
Alan Penny

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