President Donald Trump's threat to impose escalating tariffs on Mexico spooked Wall Street on Friday.
The Dow declined about 300 points, or 1.2%, on Friday afternoon. The index is on track to close below 25,000 for the first time in four months, finishing the brutal month of May in decidedly negative fashion.
The S&P 500 fell 0.9% and the Nasdaq lost 1%.
Trump's vow on Thursday evening to impose tariffs on Mexico , one of America's largest trading partners, only amplifies investor worries about how trade tensions will disrupt business and slow global economic growth. Wall Street was already growing concerned about the escalating trade battle with China.
"This is just the latest worry to put on the fire for investors," Ryan Detrick, senior market strategist at LPL Financial, wrote in a note to clients. "The big question at the end of the day though is can we really fight two trade wars at the same time?"
The United States imported $346 billion of goods from Mexico last year, including everything from auto parts and avocados to beer and televisions.
Automakers, which rely on Mexico as a vital part of their supply chain , fell sharply. Fiat Chrysler lost 5%, while General Motors declined 4% and Ford lost 3%. Parts suppliers including Lear and Delphi Technologies also stumbled.
Constellation Brands, which owns Corona and Modelo Especial, plunged nearly 7%.
Trump said the United States will impose a 5% tariff on all Mexican imports starting on June 10, as a punishment for illegal immigrants crossing the Mexican border into the United States. The White House indicated the tariff would increase by increments of 5 percentage points each month until it reaches 25% in October.
Some analysts expressed concern that Trump is imposing tariffs in response to immigration problems, not economic or trade ones.
"Tariffs can be thrown around as an economic bomb for anything now," Peter Boockvar, chief investment officer at Bleakley Advisory Group, wrote in a note to clients. "Global growth rates will only continue to suffer."
Kristina Hooper, chief global market strategist at Invesco, called it an "alarming" decision by the US administration to open up a "new and unexpected frontier" by using tariffs as a "weapon" beyond just trade policy.
"Markets don't like surprises and this is a big surprise," Hooper wrote in a note.
Worse, there were signs that the crackdown on Mexico may not be part of a broader economic strategy on behalf of the Trump administration.
In fact, Robert Lighthizer, Trump's top trade official, joined Treasury Secretary Steven Mnuchin in opposing the tariffs on Mexico, sources told CNN.
Peso, Mexican stocks plunge
The tariffs on Mexico will be "highly disruptive," Goldman Sachs analyst Alec Phillips wrote in a note to investors Friday. The bank warned the new trade tensions could hurt the ability to enact a new North American trade deal to replace NAFTA.
Investors exited Mexican assets in response to the news.
The iShares MSCI Mexico ETF tumbled 3.5%. The Mexican peso plunged 2.5% against the US dollar. That sharp currency move should help boost Mexican exports by making goods cheaper for overseas buyers.
Many US companies — including Ford and Walmart rely on the country as a central part of their supply chains.
The country is also a regional manufacturing hub for Japanese, South Korean and German automakers that assemble cars in Mexico and ship many of them to the United States. Shares in Mazda and plunged more than 7%, while losses for Toyota, Honda, Nissan and Volkswagen reached 3% or more.
"This latest round of tariffs will create economic uncertainty, and economic uncertainty creates wealth destruction," said Jack P. McIntyre, portfolio manager for global fixed income strategies at Legg Mason affiliate Brandywine Global.
Investors flock to bonds, gold
Signs of worry abounded on Wall Street.
The CNN Business Fear & Greed Index of market sentiment ticked into "extreme fear" territory on Friday, compared with "greed" a month ago.
Cash poured into ultra-safe government bonds, driving the 10-year Treasury yield below 2.15% for the first time since September 2017. Just a month ago the 10-year yield was sitting at 2.5%.
Gold, which tends to rise when investors are scared, gained 1% and climbed above the $1,300 level.
The VIX volatility index climbed 8%, though it remains well below the levels reached in December.
US oil prices plummeted more than 5% to $53.52 a barrel on Friday afternoon, driven lower by trade tensions and concerns about excess supply. Halliburton, Occidental Petroleum and Hess each fell 3% or more.
Global growth concerns
Beyond the trade front, investors were also unnerved by weak economic numbers overseas.
Activity in China's vast factory industry fell to a three-month low in May. New orders declined, likely reflecting pressure from the trade war.
In Germany, retail sales unexpectedly declined. That sent the German 10-year bond yield plunging deeper into negative territory to a record low.
"We don't want to lose the German consumer," Boockvar wrote. "The domestic side is what's kept their economy out of recession."
Longest weekly losing streak since 2011
The broadside against Mexico comes at a delicate time in global financial markets .
The Dow is on track to close lower this week, for the sixth week in a row. That would be the worst losing streak since summer 2011. With one trading session left, the Dow has fallen nearly 5.4% in May. The last time stocks fell in May was in 2012, when the Do w fell 6.2%. This has been the worst month since December, when the Dow fell about 8.7%
US stocks have slumped and bond yields have plunged in part because of worries about the escalating trade war between the United States and China. Investors fear the tit-for-tat tariffs — and threats of non-tariff retaliation — will slow economic growth, dent consumer confidence and derail business investment.
Imposing tariffs on Mexico may only exacerbate those trade concerns. The US Chamber of Commerce has estimated that about 6 million US jobs depend on trade with Mexico.
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