Shares shaken, bonds surge as Trump stirs recession risk

SYDNEY (Reuters) – US stock futures slipped and sovereign bonds rose on Friday, as investors feared that President Donald Trump's moving action to impose tariffs on Mexico would risk the United States, and Maybe everybody, they will enter recession.

FILE PHOTO: A man looks at an electronic board that shows the Nikkei stock index outside a brokerage in Tokyo, Japan, on January 7, 2019. REUTERS / Kim Kyung-Hoon

The outlook was further obscured when a key measure of China's manufacturing activity disappointed in May, questioning the effectiveness of Beijing's stimulus steps.

Markets moved aggressively to put a price on deeper rate cuts by the Federal Reserve this year, while bond yields touched new lows and curves reversed in a recession warning.

Washington will impose a 5% tariff from June 10, which will then steadily increase to 25% until illegal immigration stops across the southern border.

Trump announced the decision on Twitter on Thursday night, trapping the markets completely by surprise and triggering a race to secure ports.

"The threat of US tariffs in Mexico coming into effect in two weeks is a big blow to investor sentiment," said Sean Callow, FX badyst at Westpac.

"Mexico is the largest trading partner in the US And an explosion in commercial tensions was definitely not on the radar of the market," he added. "This is obviously a major setback for CAD, MXN and the thousands of US companies that use Mexican-made products."

Yields on 10-year Treasury bonds fell rapidly to a new 20-month low of 2.18%, while the dollar rose 1.7% in the Mexican peso. The E-Mini futures for the S & P 500 fell 0.7% and the futures FTSE 0.4%.

Asian stocks fell at the beginning, but soon attracted bidding at the end of the month, after suffering torrid weeks. MSCI's broader Asia-Pacific stock index outside Japan rose 0.3%, although it was still down 7.3% in the month.

China's Blue Chip index added 0.7%, in part, and now Beijing would have to increase its stimulus measures.

The Nikkei of Japan cut the initial losses to fall by 0.6%, but so far it was still down 6.5%.

Investors clearly feared that opening a new front in the trade wars would threaten global and US growth, and would pressure central banks everywhere to consider a new stimulus.

On Thursday, Federal Reserve Board of Governors Vice President Richard Clarida said the central bank would act if inflation stays too low or if global and financial risks jeopardize the economic outlook.

"What Clarida's comments have done is clarify in many people's minds the answer to the questions about whether low inflation that proves to be more than transitory would be enough for the Fed to ease up. Yes, "said Ray Attrill. , head of FX strategy at the National Bank of Australia.

"That served to reinforce the prevailing expectations in the market that the Fed will relax in the second half of this year."

In fact, the case that the deceleration of inflation was temporary took a hit when the underlying personal consumption expenditure index, the favored measure of the Fed's inflation, was revised up to 1% for the first quarter, from the 1.3%.

Trump's tariff threat only added to the dangers and the market further reduced the Fed's likelihood of easing this year and next. Futures imply 44 basis points of cuts at the end of the year at the current effective fund rate of 2.38%.


The bonds extended their upward trend with 10-year Treasury yields, which now dropped 32 basis points for the month and were decisively below the one-day rate.

Such reversal of the yield curve has presaged enough recessions in the past that investors are betting that the Federal Reserve will be forced to soften the policy as "safe".

However, Treasuries are not alone in the recovery, with bond yields across Europe at record or near minimum levels. Yields in Australia and New Zealand have also been affected at all times by expectations of rate cuts there.

These declines have kept the US dollar relatively attractive from the performance point of view and traded close to a maximum of two years against a basket of currencies at 98,119.

The euro piled up at $ 1.1133, having posted 0.7% in the month. The safe haven yen has fared better and had a small monthly gain on the dollar at 109.33.

Sterling was prepared for the biggest monthly decline in a year, as Theresa May's imminent departure as prime minister raised fears about a chaotic European Union divorce.

The pound was the last at $ 1.2611 and a loss of 3.2% in the month so far.

In commodity markets, spot gold rose 0.2% to $ 1,291.64 per ounce.

Oil prices fell to their lowest level in almost three months due to fears that a global economic slowdown would hurt demand. [O/R]

US crude fell 46 cents to 56.13 dollars per barrel, while Brent crude futures lost 63 cents to 66.24 dollars.

Edition by Sam Holmes and Shri Navaratnam

Our Rules:The principles of trust of Thomson Reuters.

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