Stocks close at 3 month low, bond yields tumble, after Trump hits Mexico with tariffs

Stocks ended the month down more than 6 percent at a three month low on Friday as investors feared President Donald Trump's surprise decision to impose tariffs on all Mexican imports, combined with the trade war with China, risks slowing economic growth.

The Dow Jones Industrial Average posted its sixth weekly loss, the longest slump since 2011.

The U.S. will impose a 5 percent tariff on incoming Mexican products until the country limits illegal immigration on the U.S. southern border, Trump announced in a tweet Thursday night.

“The announcement of the US administration imposing tariffs on all US imports from Mexico starting at 5 percent on June 10 and escalating to 25 percent by October adds uncertainty in a global environment of already elevated trade tensions," Elena Duggar, Associate Managing Director of credit rating agency Moody's Investor Services, said.

"New tariffs would be credit negative for the US auto sector which relies heavily on imports from Mexico. New tariffs would also raise prices for US consumers as Mexico is the US’s largest supplier of agricultural imports, including vegetables, fruits, wine and beer, and processed fruits and vegetables," the agency said.

Ticker Security Last Change Change %
I:DJI DOW JONES AVERAGES 33611.93 -394.95 -1.16%
SP500 S&P 500 4270.8 -66.64 -1.54%
I:COMP NASDAQ COMPOSITE INDEX 13049.006045 -222.31 -1.68%

Meanwhile, China is planning further retaliation against U.S. import tariffs by restricting exports of rare earth minerals used in electronics and may target specific American companies according to media reports.  The trade war is already affecting Chinese economic growth with the manufacturing purchasing managers index falling into a contraction below the 50 index level.  China's official NBS manufacturing PMI fell to 49.4 in May, from 50.1 in April in data published Friday.

China, Canada and Mexico are the U.S.'s top trading partners, with over $600 billion of imports and exports from each country, according to the U.S. Census bureau. 

Automakers in the S&P 500 stock index lost more than 4.0 percent as they would likely bear most of the cost of tariffs on Mexican imports. Some of the most popular vehicles sold in the U.S. are made in Mexico, including versions of GM’s Chevrolet Silverado pickup, the Chevrolet Blazer SUV, Volkswagen’s Jetta sedan, and Toyota Motor Corp’s Tacoma pickup.

Among railroad stocks exposed to traffic across the U.S-Mexico border, Kansas City Southern also lost more than 4 percent, the most since last October.

Bank stocks were also hit again as long term bond yields fell further below short term interest rates, threatening bank profitability.

Energy stocks fell as crude oil prices fell to three month lows. Mexico sends more than 500,000 barrels of oil to the U.S. every day, mostly to refiners that process that crude into gasoline and other products. Mexico buys more than one million barrels per day of U.S. crude and fuel, more than any other country, and retaliatory tariffs from Mexico could disrupt that trade.

Ticker Security Last Change Change %
GM GENERAL MOTORS CO. 33.06 +0.48 +1.47%
F FORD MOTOR CO. 12.58 +0.15 +1.21%
KSU n.a. n.a. n.a. n.a.
C CITIGROUP INC. 41.02 +0.10 +0.24%

The yield on the 10-year U.S. Treasury fell to 2.15 percent, a new 20 month low, from 2.5 percent a month ago. The bond market is currently pricing-in three Federal Reserve interest rate cuts by the end of next year, with Vice Chairman Richard Clarida on Thursday suggesting the central bank would be open to reducing rates if economic growth slows and inflation falls.

But the inflation measure closely watched by the Fed - personal consumption expenditures price index - rose in April for the first time this year in data published early Friday. The PCE index was up 0.2 percent for the month and 1.6 percent annually, the Commerce Department said.

The Stoxx Europe 600 Index fell to its lowest level in 15 weeks, led by autos and basic resources companies with European shares set for largest monthly drop since January 2016.

Crude oil prices were also down sharply on fears slower economic growth would hit demand. West Texas Intermediate, the U.S. benchmark, tumbled more than 5 percent to $53.20 per barrel, the lowest in more than three months.  Crude oil prices are down about 16 percent in May, the biggest monthly fall since last November.

Gold gained 1.4 percent to $1,310.60 an ounce, the highest in nearly two months.