Asia stocks sunk as Trump fires new trade salvo

Japan’s Nikkei fell 1.2 percent in early trade, to be down 7 percent for the month so far

SYDNEY (Reuters) - Asian shares extended a month-long slide and sovereign bonds surged yesterday after U.S. President Donald Trump ramped up trade tensions globally by suddenly slapping tariffs on all goods from Mexico, sending the peso tumbling.

Washington will impose a 5 percent tariff from June 10, which would then rise steadily to 25 percent until illegal immigration across the southern border 
was stopped.

Trump announced the decision on Twitter late Thursday, catching markets completely by surprise and sparking a rush to safe harbours as investors worried the escalation would upend an already fragile world economy.

“The threat of U.S. tariffs on Mexico to take effect inside two weeks is a sharp blow to investor sentiment,” said Sean Callow, a senior FX analyst at Westpac.

“Mexico is the U.S.’s largest trading partner and a flare-up in trade tensions was definitely not on the market radar,” he added. “This is obviously a major setback for CAD, MXN and the thousands of US businesses that use Mexican-made products.”

Yields on the 10-year Treasury note quickly fell to a fresh 20-month low of 2.18 percent, while the dollar jumped 2.1 percent on the Mexican peso. E-Mini futures for the S&P 500 sank 0.9 percent, leading Asian bourses lower.

Japan’s Nikkei fell 1.2 percent in early trade, to be down 7 percent for the month so far. MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.1 percent and was likewise off a hefty 7.7 for the month.

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

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

“What the Clarida’s comments have done is clarify in many people’s minds the answer to the questions of whether low inflation proving more than transitory would itself be enough to get the Fed to ease – the answer appears to be ‘yes’,” said Ray Attrill, head of FX strategy at National Australia Bank.

“That served to reinforce prevailing market expectations that the Fed will be easing in the second half of this year.”

Indeed, the case that the inflation slowdown was temporary took a hard blow when the core personal consumption expenditures (PCE) index, the Fed’s favoured measure of inflation, was revised down sharply to 1 percent for the first quarter, from 1.3 percent.

The increase was the smallest in four years and pushed inflation further below the Fed’s 2 percent target.

Trump’s tariff threat only added to the dangers and the market further narrowed the odds on Fed easing this year. Futures imply 42 basis point of cuts by year end in the current effective fund rate of 2.38 percent.

Bonds extended their bull run with 10-year Treasury yields now down a steep 31 basis points for the month and decisively below the overnight funds rate.