Memorial Day this past Monday led to a shorter trading week, which ultimately ended to the downside as more geopolitical news came out. Xi and Trump are set to meet at the end of June in Japan for the G20 meeting, there is little evidence that the two will come together to agree to trade deal during that time. The downside opened up in equity markets throughout the world as economic data globally continued to flush lower.
Chinese PMI and German CPI data came out weaker than expected, US earnings continued as retail numbers did not impress leading the industry lower. The retail ETF, XRT experienced a lot of downside throughout the week as the sector was down 4.10% this week. This brought fear into the industry, how resilient is the US consumer? Should a downtrend in markets come sooner than later consumption will hit lows as it has already been decreasing due to the trade talk escalation and the increased prices in consumer goods?
Equity outflows ramped up by Wednesday pumping money into risk-off such as bonds and commodities. Gold was at the center of money inflows. Gold rallied strongly into the close of the week into the $1310-12 resistance off lows earlier in the week. While crude oil futures took a substantial beating into the end of the week as the $53.50 level was broken price nearly slipping into $53.00.
Trump came out with quite the announcement on Thursday evening ahead of the last trading day of the week and of the month. Tariff man himself announced increased tariffs on ALL Mexican goods, more information below. All of this while interest rates continued to fall, the 10-year dropped under the 2.15% level nearing 2%, this is a 2-year low.
Here is a look of last week’s stock market on a daily basis (red vertical lines split days).
Stock Market and Sector Overview
Here is a break down of the weekly performance in various stock market sectors (top chart):
- Energy stocks down 4.48%
- Technology down 2.64%
- Financials down 2.95%
- Retail down 4.80%
- Utilities down 4.48%
Overview of key markets last week (bottom chart):
- Crude oil down 9.60%
- S&P500 down 2.76%
- Silver was up 0.14%
- Gold up 2.06%
- US dollar up 0.19%
MORE TARIFFS, Trump using his tactics on Mexico now.
Tariff Trump at it again, now dubbed “Tariff Man” has vowed to introduce more tariffs. This time, Mexico suffers the wrath. Trump vowed to impose a 5% tariff on all Mexican goods until Mexico does something to end the illegal immigration of their population to the states. The 5% tariff will be effective starting June 10th and that could increase to 10% by July 1st, to 15% by August 1st, 20% by September 1st and 25% by October should Mexico fail to do something about the illegal immigration. Trump is swing tariffs left, right and center. What did that do to the US equity market? US equities DUMPED. S&P 500 ES futures dropped off the Globex open when the Trump tape bomb hit at 2785 down to the 2751 area on the lows of the US session. A clean near 40 point fall, the power of news! Lower lows and lower highs are continuously printing on the ES futures chart with strong support around the 2750 level, we could see a third move into that area break to the downside and hold the 2750 as resistance on the retest higher for a slide into 2720. This is the scenario should trade talks escalate.
Just last year, Mexico sold over USD 340 billion worth of goods to the US. Mexico is a huge part of the US economy, just like China. Both US and Mexican equities got hit off this news, and will continue to fall in this manner should the tariffs be implemented. Another indication of global economic weariness that is catalyzed by this recent news is the continuous fall of the 10-year US yield. As the 10-year continues to fall and stay below the 2% mark, the US FED has expressed its openness to easing monetary policy.
This spills over into the NAFTA 2.0 deal that has not yet been finalized, meaning this deal could be jeopardized. This will hinder the development that deal and further deteriorate the relation between Mexico. Trump is attempting to do to Mexico what he has been doing to China. So far it has not been working.
This tariff slap affects American businesses as well as they plot to take legal action against the White House, planned for this coming Monday. Its safe to say that the American automakers are the displeased party since that is the industry that will be impacted the most, along with other electrical appliances.
Mexican president Andres Manuel Lopez Obrador (AMLO) had a few choice words to say about the whole situation, listing that it won’t be beneficial for either population for these tariffs to be implemented. He also mentioned that Mexico has taken preventative actions to increase its border security. He stresses that “We need to help so that migrants don’t enter the US illegally but we also have to help the people. Nothing of authoritarian treatment, they are human beings”.
Let’s not forget about China and the ongoing trade talks between the Asian superpower. Mike Pence went onto say that the US is not afraid of increasing tariffs on Chinese goods by two-fold. This leads to further downside in US yields, the 10 year dropping off significantly. For the time being its a pretty stern game of chicken between the two worlds superpowers. Who will fold first? Trump has 5x more goods to slap tariffs on than China. Trump plans on bombarding China with tariffs until they fold, however, China may have an ace up their sleeve. Its actually Gas! The volatile commodity has been caught between the two nations as there is little sign of a deal being reached.
China has expressed its decision on hitting the US with tariffs on $60 billion worth of goods and restricting rare earth exports which are vital for a lot of US good productions (tech). China is a monopoly in the rare earth export field, holding just over 70% of the market share. What is the next step? China has already impacted the development of LNG (liquified natural gas) by hiking tariffs on US LNG to 25% from 10%. Putting a hard halt on many nat gas projects in the US! (funded by wealthy oil and gas majors). The US is already at a disadvantage without the increased tariff on LNG due to Qatar as the worlds leading LNG producer. The US is already struggling for territory as an exporter. This could put a large dent in the US plans for future trade talks.
Weekly Economic News
The quieter week ahead in terms of high impact events with just three days of high impact US events in the week. Traders should keep an eye on crude oil in the following week along with trade news out of the US and China.
Sunday, Caixin manufacturing PMI out of China.
Monday, ISM data out of the US in the morning and retail sales out of Austalia in the evening.
Tuesday, cash rate, RBA rate statement and GDP data out of Australia will move the Aussie dollar.
Wednesday, ISM non-manufacturing PMI out of the US in the morning.
Thursday, Monetary policy statement out of the Eurozone pre market to stir up the Euro followed by the ECB press conference. The other pre market even is the trade balance out of Canada.
Friday, all the high impact news is pre market, employment data out of Canada and out of the US. Which will move US equities.
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