What's going on?
America’s announcement of new import taxes (a.k.a. tariffs) on Mexican products sent investors running from stock markets on Friday – and straight into the arms of government bonds, the yields of which hit new lows.
What does this mean?
The US believes that Mexico isn’t doing enough to stop people illegally crossing the US-Mexico border – and now plans to charge an initial 5% tariff on all Mexican imports in response (tweet this). This will rise each month until it reaches 25% unless Mexico agrees to a deal that curbs illegal immigration.
More tariffs will likely hamper economic growth further – and with the US appearing to renege on its trade deal with Canada and Mexico, investors may worry that any deal the US eventually forges with China won’t hold. But a US-China handshake is probably some way off: China’s initial retaliatory tariffs against the US came into effect on Saturday.
Why should I care?
For markets: “Selling in May and going away” wasn’t a bad idea.
The old adage suggesting investors sell stocks in May and not return until later in the year may have served them well. US stocks had their second-worst May since the 1960s, and European shares didn’t fare much better. As investors everywhere shunned stocks thanks to fresh trade uncertainty and instead bought reliable government bonds, higher demand pushed bond prices up and yields down (the two move inversely). Indeed, German 10-year bond yields fell to their lowest ever on Friday.
Zooming out: Consumers spend their way out the mire.
Investors may have seen a silver lining in data out on Friday that showed growth in US consumer spending picked up in April compared to March. And with American consumer confidence in May at a six-month high (thanks to a strong jobs market), spending may rise further. That’d be a relief to retailers like Canada Goose, whose results missed expectations last week, and Gap, which cut its forecast for this year.