Wall Street strategists woke up Friday morning to a new front in the trade war. President Donald Trump announced late Thursday night that the U.S. will impose a 5% tariff on all Mexican imports beginning June 10.
The White House said it will increase the tariff in the coming months if Mexico doesn't take steps to control its border with the U.S.
Stocks opened down more than 300 points as strategists scrambled to assess the latest fallout and how best to advise clients.
"This is an escalation of trade wars and as such increases global uncertainty and lowers global trade and investment," Bank of America said.
This may also be a way for the White House to pressure Congress, according to strategists at Goldman Sachs.
"We view this as an attempt to show action on the immigration issue while also pressuring congressional Democrats to pass USMCA," they wrote.
One strategist predicted that the tariffs wouldn't last long but the damage may already be done.
"President Trump's latest trade bombshell — the threat to impose tariffs on Mexico if it does not stop the flow of illegal immigrants into the US — might turn out to be a short-lived threat that is quickly defused by commitments on border security, but it nonetheless looks damaging at a number of levels," Evercore ISI's Krishna Guha said.
Another analyst noted how things seemed to be on the right track as recently as last month but wondered whether any deal was even possible.
"As we've been arguing, these tweets have the potential to change the dynamics of global markets and it now seems like we could get a serious trade escalation that wasn't likely at the start of last month, especially as it had appeared Trump had looked like he wanted to get a deal done in 2019," Deutsche Bank said.
"The landscape has changed dramatically and it could be an interesting summer ahead."
Here is what the major strategists are saying:
Bank of America
"This is an escalation of trade wars and as such increases global uncertainty and lowers global trade and investment. So it negatively affects global growth. The escalation of trade wars in North America does not bode well for the ratification process of USMCA (new NAFTA). Despite encouraging news up to May 30 in the morning with the three countries sending the USMCA to their respective legislatures for ratification, if the US follows through with blanket tariffs to goods exported by Mexico, the Mexican Senate would find it hard to ratify the USMCA. Democrats in the US lower house of Congress would also find it difficult to ratify USMCA (one more reason to add to an already large list)."
Evercore ISI
"President Trump's latest trade bombshell — the threat to impose tariffs on Mexico if it does not stop the flow of illegal immigrants into the US — might turn out to be a short-lived threat that is quickly defused by commitments on border security, but it nonetheless looks damaging at a number of levels. At the big picture level, it suggests that Trump trade policy might well mean a permanent state of endemic uncertainty and instability in the global trading system not simply a hard-headed sequential re-set of prior arrangements that started with Mexico and proceeds via China to Europe and Japan."
UBS
"Alongside putting obvious strains on the USMCA ratification process, tariffs on Mexico would increase pressure on the global supply chain. Within tech, we expect hardware companies with exposure to computers, servers and TVs would be most affected. For global automakers, tariffs would pose risks not just to Mexican vehicle exports to the US, but also to US-built cars reliant on parts and components produced in Mexico."
Nomura
"President Trump's action could effectively derail ratification of the US-Mexico-Canada (USMCA) agreement this year. Republicans in Congress have pushed back against previous tariffs from the administration targeting Mexico or Canada and the action announced [last night] will likely engender strong opposition in Congress."
Deutsche Bank
"As we've been arguing, these tweets have the potential to change the dynamics of global markets and it now seems like we could get a serious trade escalation that wasn't likely at the start of last month, especially as it had appeared Trump had looked like he wanted to get a deal done in 2019. The landscape has changed dramatically and it could be an interesting summer ahead. The reality also is that with it being the first day of June tomorrow, tariffs will officially kick in between the US and China with the US applying 25% tariffs on $200bn of China exports to the US, while China will apply 5-25% tariffs on $60bn of US exports to China."
J.P. Morgan
"Earlier this month we downgraded Mexico based on poor 1Q results. However, we also noted that none of the top down risks which we've been highlighting for a while have gone away, and in particular the USMCA approval process was to become a key issue to watch into the 2H of the year. The timing couldn't have been more perfect. Tonight, Pres. Trump tweeted that he would impose a 5% tariff on all Mexican imports as a measure to curb illegal immigration. Pres. Lopez Obrador responded with a conciliatory (but firm) letter requesting this to be resolved via bilateral dialogue and stating that Mexican officials would travel tomorrow to Washington to meet US representatives in Person. All of this comes after news earlier this month that seemed to point towards the USMCA moving ahead in the right direction: US removing tariffs for Mexican and Canadian steel, P.M. Trudeau sending to Congress an initiative to have USMCA ratified which was echoed by AMLO today in the Mexican Congress. Where to go from here? Remain UW but don't press the panic button… just yet."
Goldman Sachs
"We view this as an attempt to show action on the immigration issue while also pressuring congressional Democrats to pass USMCA. While still possible, enactment of USMCA prior to the 2020 election would no longer be our base case if these tariffs are implemented as proposed."