Global equity markets closed out a sharply negative month with a final burst of selling on Friday, as Donald Trump’s threat to hit Mexico with tariffs sent investors rushing to the safety of government bonds.
The US benchmark S&P 500 sank 1.3 per cent to close at 2,752, taking its decline in May to 6.6 per cent, while Treasury yields slid to a new two-year low.
The US president’s move to link tariffs with efforts to control immigration, announced abruptly late on Thursday, marked an escalation of a global trade war that investors already fear could hit economic growth in the US, China and major European economies including Germany and France.
“Sometimes you have to reconsider everything you ever considered a certainty. Today is such an occasion,” said Ulrich Leuchtmann, an analyst at Commerzbank.
Mr Trump said his proposed tariffs on goods imported from Mexico would begin in June and keep ratcheting higher until the government of President Andrés Manuel López Obrador agreed a deal to halt migration through his country from Central America en route to the US.
The move suggested the North American free trade pact negotiated by the US government with Mexico and Canada “isn’t worth the paper it is printed on”, Mr Leuchtmann added.
Mexico’s peso tumbled 2.4 per cent versus the dollar to trade at its lowest level since January, and lost ground against every other major currency.
Investors have sought safety in highly rated government and corporate bonds, sending prices higher and pulling down yields, which move inversely to price. The yield on the Barclays aggregate index of investment grade paper sank to the lowest level since January 2018 on Friday. The 10-year Treasury yield tumbled another 8 basis points to 2.13 per cent.
In the most notable example of the effect of this flight to safety, Germany’s benchmark 10-year Bund yield fell 2.8bp to minus 0.205 per cent — its lowest level on records that stretch back to the reunification of Germany in 1990, according to Bloomberg data.
Other perceived havens, such as the Japanese yen and gold, also advanced on Friday.
While some investors still hope that negotiations might avert the threatened tariffs on Mexican goods before they come into effect on June 10, the White House’s latest move was still a major threat to markets, according to Krishna Guha of Evercore ISI.
“It suggests that Trump trade policy might well mean a permanent state of endemic uncertainty and instability in the global trading system not simply a hard-headed sequential re-set of prior arrangements that started with Mexico and proceeds via China to Europe and Japan,” he said.
The EuroFirst 300 index dipped 0.8 per cent on Friday, while the Japan’s Topix benchmark fell 1.3 per cent and Hong Kong’s Hang Seng declined to its lowest level since January.
Stocks in developed and emerging markets globally in May suffered their biggest pullback since the volatility of December last year, according to MSCI’s broad All-World index.
Shares in carmakers and parts suppliers, which are seen as particularly sensitive to trade barriers because of complex, global supply chains, sustained more severe selling. The index tracking Europe’s automotive industry fell 2 per cent. In the US, where supply chains are most closely entwined with Mexico, Ford shares slid 2.3 per cent, while General Motors shares tumbled more than 4 per cent.
Concern over global trade has been amplified by gloomy signs in some of the world’s largest economies.
A survey released on Friday suggested China’s sprawling manufacturing sector contracted in May. Meanwhile, other surveys have pointed to subdued activity in Germany and France, the eurozone’s two biggest economies.