Trump casts shadow on USMCA with new tariffs on Mexico

Summary:
- Trump imposes levies on Mexico as migration surges
- Chinese manufacturing PMI back below the 50 pts threshold
- Asian indices sink on risk-averse moods

Trump targets Mexico with new tariffs

Just a few days ago the United States said steel tariffs on Mexico and Canada will be removed - a move labelled by many as preparation for USMCA ratification. However, the US President Donald Trump may have just made ratification of the agreement much harder. Namely, Trump decided to impose a 5% tariff on Mexican goods flowing into the US starting from 10 June. The levy is said to be repercussion of the surge in illicit crossings of the US-Mexico border. Moreover, Trump said that the tariffs will increase and they may be as high as 25% on 1 October. The tariffs will be dropped once the problem with migration is remedied. Apart from throwing hurdle towards USMCA ratification, the US President also risks Mexico retaliation. Let us recall that Mexico imposed tariffs on US farm products in response to Trump’s steel tariffs. As trade and migration are two main themes of Trump’s political career it seems apparent that this move is part of gearing up for next year’s US presidential election. However, given how important Mexico is for the United States in terms of trade, it looks like Trump is trying to win voters’ support at the cost of economy.

USDMXN surged following news of new tariffs on Mexico. The pair broke above the resistance zone that limited upward moves so far this year. Surge may extend much higher in case new tariffs result in a failure to ratify USMCA. Source: xStation5

Chinese manufacturing PMI dips into contraction area

The Chinese PMI indices for May were the key reading scheduled for release during the latest Asian session. The reading showed that non-manufacturing gauge remained intact against last month’s reading of 54.3 pts (expectations also pointed at 54.3 pts). However, when it comes to China, the world is especially interested in the condition of the manufacturing sector and it has disappointed. The reading showed a drop from 50.1 pts to 49.4 pts meaning that the sector is back into the contraction territory. It shows that improvement earlier this year was just temporary and that businesses are no indifferent to the latest escalation of trade war. Today’s reading was twelfth in a row that showed new export orders subindex struggling below the 50 pts threshold. The reading combined with new tariffs on Mexico is likely to pressure risky assets today.

HSCEI (CHNComp) tried to climb into the resistance zone ranging 10350-10450 pts in the first half of the session. However, release of lacklustre PMIs saw reversal that erased all of the earlier gains. In turn, the index is trading lower on the day. Source: xStation5

In other news:
- Japanese industrial production up 0.6% MoM in April (expected 0.2% MoM advance)
- China is said to be ready with a plan to restrict rare earths exports
- German retail sales down 2% MoM in April (expected 0.4% advance)