• US stocks are on the way down as the trade war intensify.
  • The index broke below the 200-period simple moving average (SMA).

S&P500 daily chart
The S&P500 Index is trading in a correction down below the 200-period simple moving average (SMA).

S&P500 4-hour chart

The index is under selling pressure below its main SMAs. The S&P500 broke below the 2,760.00 level. The market is weak and 2,720.00 and the 2,700.00 handle can become bear targets. Resistance is at the 2,770.00 and 2,800.00 levels.

Additional key levels

  • The Dow Jones Industrial Average DJIA, -1.41% dropped 354.84 points, or 1.4%, to 24,815.04.
  • The S&P 500 index SPX, -1.32% fell 36.80 points, or 1.3%, to 2,752.06.
  • The Nasdaq Composite COMP, -1.51% dropped 114.57 points, or 1.5%, to 7,453.15.

Wall Street was bleeding and closing lower on Friday as global markets turn soar on global growth fears. Despite moving forward with the U.S.-Mexico-Canada Agreement by processing a bill towards Congress to implement the agreement, the successor to NAFTA, Trump came out with a shock announcement in early Asia catching sleepy Friday traders off guard.

In a tweet, Trump was saying that the U.S. will impose a 5% tariff on all goods from Mexico unless that country stops the flow of illegal immigrants into the country. Then, Trump followed up and said, “Tariffs will permanently remain at the 25% level unless and until Mexico substantially stops the illegal inflow of aliens coming through its territory." This news sent risk into a tailspin which sped up throughout European and US markets, turning the trade war screw in even tighter just as Sino/US trade wars were escalating.

Hu Xijin, The Chief in Editor of the Global Times, which has become to the go-to place on Twitter for Chinese retaliation sentiment to the trade spat, proclaimed that China will indeed strike back and said, “Based on what I know, China will take major retaliative measures against the U.S. placing Huawei and other Chinese companies on Entity List. This move indicates Beijing won’t wait passively and more countermeasures will follow."

In addition to the trade disputes, Chinese data from overnight showed that the economy has fallen back into contraction. China’s manufacturing purchasing manager index (PMI) dropped to 49.4 versus 49.9 forecasts and below the 50.1 prior while non-manufacturing PMI fell below the 53.5 market consensus to match 54.3 prior.

As a result of all of the above, The Dow Jones Industrial Average DJIA, -1.41% dropped 354.84 points, or 1.4%, to 24,815.04, The S&P 500 index SPX, -1.32% fell 36.80 points, or 1.3%, to 2,752.06 and the Nasdaq Composite COMP, -1.51% dropped 114.57 points, or 1.5%, to 7,453.15.

DJIA levels

As for monthly results, the Dow was falling 6.7% and the index stays technical negative and capped below the 23.6% Fibo around 25200. The bears can now target a run towards the 24500s and then 50% of the upside run made at the end of Dec at 24150. On the upside, bulls need to get back above the 38.20% Fibo in the 25300s, a triple bottom level on the 4HR outlook. 25430 is roughly where the 200 D EMA is located.

  • The Chinese economy is suffering from trade wars, according to data released today.
  • Chinese PMI's tumble back into contraction territory.

The Chinese economy is suffering, especially in the manufacturing sector, as seen today with the release of Chinese PMIs, (leaked early). China’s manufacturing purchasing manager index (PMI) dropped to 49.4 versus 49.9 forecasts and below the 50.1 prior while non-manufacturing PMI fell below the 53.5 market consensus to match 54.3 prior.

In the detail, where most alarm bells are sounding off, New Orders are back into contraction territories as export orders drop out of sight. also, inventories are on the rise and output growth is slowing. Employment also slipped and small enterprices, the back bone to the economy, are suffering.

This data is about as low as it has been in a decade and considering today's escalation of global trade tensions, thus growth concerns, it does not bode well for risk in general. Such FX pairs as yen crosses and commodity currencies will likely remain under pressure again and the recently renewed optimistic expectations for the Chinese economy have just been checked.

  • At the time of writing, USD/JPY's low for the session is at 109.22 while the Aussie made a low of 0.6900.
  • Dow Jones unofficially closes down 353.39 points, or 1.40% , at 24,816.49.
  • S&P 500 unofficially closes down 36.78 points, or 1.32%, at 2,752.08.
  • NASDAQ unofficially closes down 114.81 points, or 1.52% , at 7,452.91.

The stock markets were hammered again Friday following a risk-off Asian session on the back of the trade war escalations – Mexico: Trade pressures from the US – TDS

US President Trump announced a tariff rate of 5% across the board on all imports from Mexico starting June 10 and will rise to 25% by October. BBVA analysts argue that incremental tariffs would likely push the Mexican economy into a recession, while at the same time inflation risks, an overly hawkish Banxico and fiscal constraints would limit the room for countercyclical fiscal and/or monetary policies.

Key Quotes:

“The incremental rise in the tariff rate (by 5% each month until it reaches 25%) unless Mexico “substantially stops” migration flow to the US is more uncertain. Yet, the progress would be “solely judged” by the US government and given that the time windows are so short and the problem so big, the chance that the tariff rate increases is not low but is not the base case scenario at the moment as Mexico will push for negotiation and will likely attempt to show results on the southern border.”

“The negative effect on the Mexican economy would mainly be through the investment channel and its magnitude ultimately depend on two factors: i) the tariff rate, and ii) on how the exchange rate (ER) reacts. The flexible exchange rate will work as a shock absorber to limit the effects on the trade channel. The impact of the potential starting tariffs of 5% would likely be offset by a further depreciation of the Peso (from the current 3% to 5%). Since the 5% tariff rate would be imposed across the board, a depreciation of a similar magnitude (with a likely overshooting due to heightened uncertainty) should help offset the effect on exports without introducing distortions within sectors.”

“The possible approval of the USMCA has less significance now. Even with an agreement in place, investors would know that trade restrictions may come at any time and for any reason.”

Banxico should not react neither intervening with reserves to try to limit the Peso depreciation (which would be pointless and ineffective) nor through monetary policy as it would not stop potential depreciation and if anything would only partially limit the shock absorber purpose of the flexible exchange rate. In short, these measures would be ineffective and would have a cost.”

“The tariff threat is likely a game changer for monetary policy. We were expecting Banxico to start easing monetary policy later this year. This will not happen following Trump’s announcement. That is, there is little room for a countercyclical monetary policy in the short term, and the room for fiscal policy seems even more limited on a more permanent basis.”

Fitch Ratings-in New York has put a piece out on the escalating trade tensions between Mexico and the U.S. will disrupt Mexican economic growth, which has already shown signs of deceleration, says Fitch Ratings.

  • These tensions could also delay approval of the United State-Mexico Canada (USMCA) trade agreement.

Full report

  • U.S. business lobbying group calling on President Donald Trump to back down on Mexican tariffs.
  • USD/MXN + 2.39% at time of writing.

Reuters has reported on Mexico’s president and the top U.S. business lobbying group calling on President Donald Trump to back down from a threat to impose punitive tariffs on Mexican imports, in a dispute over migration that could shock Mexico’s economy.

Trump's follow-up Tweet on Friday

“Mexico makes a FORTUNE from the U.S., have for decades, they can easily fix this problem. Time for them to finally do what must be done!”

Key notes from the article:

  • Trump said he will introduce the tariffs on June 10 if Mexico does not halt the flow of illegal immigration, largely from Central America, across the U.S.-Mexican border, battering Mexican financial assets and denting global stocks.
  • The plan would impose a 5% tariff on Mexican imports starting on June 10 and increase monthly, up to 25% on Oct. 1.
  • Such levies would deliver a heavy blow to Mexico’s economy, which is underpinned by exports to the United States of goods from avocados and tequila to televisions and cars made by companies such as Ford Motor Co and Nissan.
  • The influential U.S. Chamber of Commerce business group is looking at ways to challenge Trump’s tariff move against Mexico, including legal options. “We have no choice but to pursue every option available to push back,” Neil Bradley, the group’s executive vice president and chief policy officer, told reporters.
  • Other industry groups also criticized Trump’s threat, saying it would cost American businesses, farmers and consumers who have already been bearing the brunt of the separate, lingering U.S. trade dispute with China. “These proposed tariffs would have devastating consequences on manufacturers in America and on American consumers,” Jay Timmons, president of the National Association of Manufacturers, said in a statement.
  • Auto trade organizations expressed concern a tariff war with Mexico would undermine efforts to win U.S. congressional approval for the new United States-Mexico-Canada Agreement, which is meant to replace the North American Free Trade Agreement.
  • Pledging to exercise “great prudence” in seeking a resolution to the tariff dispute, the Mexican president said he did not want to involve the World Trade Organization for now.
  • In a letter responding to Trump’s announcement on Thursday, Lopez Obrador called Trump’s America First policy “a fallacy” and accused him of turning the United States into a “ghetto” that stigmatized and mistreated migrants.

Market reactions

Mexico’s main stock index was down 1.3% on Friday after opening the session sharply lower, and the peso currency was down more than 2.5% against the dollar.

USD/MXN + 2.39% at time of writing.

According to analysts from Rabobank, explained that the EUR/USD pair has traded a tight range recently but the bias has been skewed lower this year. They see the Euro still vulnerable to a deterioration in fundamentals, while the USD is being propped higher by safe haven flows.

Key Quotes:

“Indecision is an apt word to describe the performance of EUR/USD in recent weeks. In spite of a realm of global economic and political uncertainty the currency has maintained a tight trading range, lacking the enthusiasm for a break out in either direction. That said, despite the recent vacillation the currency pair has managed to maintain a slow, tortuous trend lower since the start of the year. It is our view that this will reach the 1.10 area on a 3 month view with the USD set to benefit from safe haven inflows despite market speculation that the Fed could be readying itself for a rate cut in the not too distance future.”

“We have maintained for a long time that it would be a mistake to view the USD’s fundamentals in isolation. In the final weeks of last year the market started to look ahead to a less hawkish Fed. More recently the inversion of the US yield curve is leading to speculation that the Fed could be cutting rates potentially by the end of this year in an effort to soften the impact of a potential recession in 2020. This news, however, has been unable to significantly undermine the value of the greenback – the DXY USD index has maintained an uptrend since early 2018. The USD is performing as a safe haven for many investors as fundamentals elsewhere worsen and risk appetite retracts. The EUR, by contrast remains susceptible to a worsening in domestic fundamentals.”

“While we see scope for the USD to underperform the JPY in the coming months we expect the USD to remain well supported against a basket of currencies and see scope for EUR/USD to edge lower to 1.10 in the coming months before edging higher in 2020 on the back of Fed rate cuts.”

  • DXY is hit by the the trade war.
  • DXY erases almost three days of gains.

DXY daily chart

The US Dollar Index (DXY) is in a bull trend above its main simple moving averages (SMAs). DXY decline sharply as it dropped almost to 3-day lows.

DXY 4-hour chart

Bears will try to break below 97.55 swing low.

DXY 30-minute chart

Sellers took the lead below the SMAs. Bears will try to break 97.70 to reach 97.55 and 97.30 to the downside. Resistances are seen at 97.90 and 98.10.

Additional key levels