Mexico tariffs will drive stock market into correction territory this summer

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Semi-trucks cross the border at the Zaragoza International Bridge, in Juarez, Mexico, across the border from El Paso, Texas on May 31, 2019.

Paul Ratje | AFP | Getty Images

In a “two front trade war” the market may find correction territory, according to RBC Capital Markets.

In an escalated trade war with China and now Mexico, U.S. equities may fall 10% from their recent highs, RBC Capital Markets’ head of U.S. equity strategy Lori Calvasina said in a note to clients Monday.

“The potential for tariffs on Mexico make it even more likely that the S&P 500 will fall to 2650 this summer, taking the index 10% below its April 2019 high, ” said Calvasina.

Last week, President Donald Trump announced the United States will impose a 5% tariff on all Mexican imports starting on June 10. The president said these levies will stay in place until the Mexican government does more to stop illegal migrants from entering the U.S.

Trump’s tariffs on Mexico come after a broken trade deal with China caused the president to hike tariffs on $200 billion worth of Chinese goods. In retaliation, China put tariffs on $60 billion worth of imports.

Its important to note that the S&P 500 is already down more than 6% from its high in April.

To get a sense of which sectors in the U.S. equity market are most at risk during an escalated trade war with Mexico, Calvasina tracked which companies mentioned Mexico on its earnings calls in the fourth quarter of 2016, following Trump’s victory in the 2016 election, and the third quarter of 2017, during NAFTA renegotations.

The Energy, Materials, and Consumer Staples sectors have the most entanglements with Mexico, Calvasina concluded, and Utilities, Financials, Health Care, REITs, Tech, and Communications have the least exposure to Mexico.

RBC also evaluated companies with greater than 5% revenues from Mexico.

“Nearly two-thirds of the names that we’ve identified as getting at least 5% of their revenues from Mexico underperformed the S&P 500 on Friday, the first full trading session after the Mexico tariff news broke when the broader market fell 1.3%,” said Calvasina.

Lear Corp., Kimball Electronics and American Axle & Manufacturing have more than 5% of their revenues from Mexico and were all down more than 5% on Friday.

PepsiCo, Union Pacific Corp., and Sempra Energy are also on the list.

Calvasina said for now, she thinks the Mexico tariffs won’t go through past the 5% level but the markets are bracing for the worst.

The Dow Jones Industrial Average futures are set to open down 80 points on Monday, after the benchmark has posted six straight weeks of losses.



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