Market Action

The euro, and European markets at large, are relatively stable as the fear of a wave of anti-EU and nationalist parties being elected to the European Parliament did not come to pass. These groups did, however, manage to secure 23% of the seats in parliament, but the pro-EU parties largely held their ground. The euro is steady at $1.12, but many issues, like disciplinary actions against Italy, threaten to rock the boat.

US President Donald Trump has drawn into question the fate of the USMCA/NAFTA trade deal with threats to place tariffs on Mexico. The heightened tensions makes it likely that Mexico, the United States’ third largest trading partner, will be forced to retaliate against the US. President Trump is taking this action to punish Mexico for the influx of illegal immigrants (US officials say 80,000 illegal immigrants are being held in custody, with an average of 4,500 arriving daily). President Trump has said the tariffs will amount to a 5% levy on “all goods coming into our country from Mexico” from June 10, which will “gradually increase until the Illegal Immigration problem is remedied.” This move pushed a spike in safe haven assets with gold rising above $1300/ounce. Stocks largely are down on the end of the week, but auto stocks in particular took a hit on Friday.

US Treasury Notes rose and equity markets dropped after reports that Beijing may curb its exports of rare earth metals to the US. The Pentagon is working to reduce US reliance on Chinese rare earth minerals after recent threats from China. China accounted for 80% of US rare earth imports between 2004 and 2017. Efforts to build US plants are still in the early stages and lack unified support from Congress and the White House. The 10-year Treasury Note yield dropped to 2.13%. The 2-year note yield dropped to 1.92%, while the 1-month TB yields 2.36%, which betrays that the yield curve inversion along with the fears of a slowdown have returned to the markets.

The Chinese government said on Friday that it was putting together an “unreliable entities list” of foreign companies and people, a first step toward retaliating against the United States for denying essential American technology to Chinese companies. China’s Ministry of Commerce said the list would contain foreign companies, individuals and organizations that do not abide by market rules, violate the spirit of contracts, reject commerce with China for non-commercial reasons, and damage the integrity of Chinese companies. The language is reminiscent of that used by the Trump Administration with regards to trade. The administration has begun to place some Chinese companies on its own “entities list.” Shortly after placing Huawei on its “entity list”, many tech-companies followed suit and stopped supplying Huawei.

What could affect markets in the days ahead?

On June 5th, the European Commission is likely to start disciplinary steps against Italy over the level of the country’s rising debt and structural deficit. The moves can end in fines on the grounds that excessive borrowing can threaten the stability of all 19 countries sharing the euro. Italy narrowly escaped the EU’s excessive deficit procedure last December by striking a compromise with the Commission after an unprecedented clash over Rome’s 2019 draft budget. Italy’s Deputy Prime Minister Matteo Salvini said the European Commission could impose a €3 billion fine.

The US will release its monthly jobs report next week. The US is expected to have added roughly 180,000 jobs. Data will also be released for factory orders, private sector payrolls, service sector activity, the Fed’s “Beige Book,” and the trade balance. Labor markets have been a bright spot during the Trump presidency, and a failure to meet expectations could further destabilize markets that are already shaken by announcements of tariffs from both the US and China.

UK Prime Minister Theresa May will officially step down on June 7th. The race to succeed Prime Minister May has heated up with many Tory leaders moving to seize the reigns of leadership. One Mr. Boris Johnson has risen as an early favorite and the ascension of the Conservative firebrand would likely lead to a hard-Brexit and a possible disaster for the British economy.

This Week from BlackSummit

EU Elections and Other Unfolding Stories: What Can we Decipher?

John E. Charalambakis

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