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Equities

Canada’s main stock index slipped at open on Friday, as energy shares were hit by a more than 2 per cent drop in oil prices, following President Donald Trump’s shock threat of tariffs on Mexico.

At 10 a.m. ET, the Toronto Stock Exchange’s S&P/TSX composite index was down 117.98 points, or 0.73 , at 15,971.26.

In economic news, Canada’s economy expanded at an annualized pace of just 0.4 per cent in the first three months of the year, giving the country its weakest back-to-back quarters of growth since 2015. Statistics Canada says the real gross domestic product reading for the first quarter follows a revised reading of just 0.3 per cent in the previous quarter.

Health care stocks were the biggest decliners, down 3.2 per cent. Cronos was off 5.2 per cent, Canopy down 4 per cent and Aurora off 3.6 per cent.

Energy stocks were off 1.2 per cent with Encana down 3 per cent, Suncor off 1.8 per cent and Imperial Oil off 1.2 per cent.

Consumer discretionary stocks were down 1.1 per cent and Financials were off 1 per cent.

U.S. stocks opened sharply lower on Friday, hit by fears that President Trump’s threat of tariffs on Mexico could prove the trigger that pushes the world’s largest economy into recession.

The Dow Jones Industrial Average fell 320.49 points, or 1.27 per cent, shortly after the open to 25,046.31. The S&P 500 was lower by 36.96 points, or 1.33 per cent, at 2,751.90. The Nasdaq Composite dropped 108.03 points, or 1.43 per cent, to 7,459.69 shortly after the opening bell.

The United States will impose a 5 per cent tariff on all goods coming from Mexico starting on June 10 until illegal immigration is stopped, Trump said in a tweet late on Thursday. Mexican President Andres Manuel Lopez Obrador said he would respond with “great prudence.”

That shocked global financial markets on Friday with carmakers and manufacturers bearing the brunt of the damage.

“It is a very sticky situation,” said Art Hogan, chief market strategist at National Securities in New York.

“American companies needed to find supply chains outside of China when it looked like the (U.S.-China) trade deal is going to take much longer and one of those countries that was pointed to outside the pacific was Mexico.”

Wall Street is on course for an almost 6 per cent decline in May, its worst performance this year and the trigger for a flood of money into the bond market that has encouraged expectations of a U.S. recession.

Adding to risks was Beijing’s warning on Friday that it would unveil an unprecedented hit-list of “unreliable” foreign firms in retaliation for U.S. tariffs.

U.S. Treasury yields fell to new multi-month lows, while the yield curve, as measured in the gap between three-month and 10-year bond yields, remained heavily inverted. An inversion in the yield curve is seen by some as an indicator that a recession is likely in one to two years.

U.S. automakers were the worst hit from Trump’s announcement as they have long built vehicles in Mexico, taking advantage of the country’s cheap labour, trade deals and proximity to the United States.

Shares of General Motors Co slid 4.3 per cent, while those of Ford Motor Co fell 2.9 per cent.

Constellation Brands, which has substantial brewery operations in Mexico, slid 6.5 per cent.

Tariff-sensitive industrial bellwether Boeing Co dropped 1.6 per cent and Caterpillar Inc declined 1.8 per cent.

FAANG stocks - Facebook Inc, Apple Inc, Alphabet Inc, Netflix Inc and Amazon.com Inc - were also down between 1 per cent and 1.5 per cent.

Data showed U.S. consumer prices increased in April, which could support the Federal Reserve’s contention that recent low inflation readings were transitory and allow the central bank to keep interest rates unchanged for a while.

The Commerce Department said its core personal consumption expenditures (PCE), the Fed’s preferred inflation measure that excludes volatile food and energy components, gained 0.2 per cent last month after edging up 0.1 per cent in March.

Among other stocks, Gap Inc tumbled 13.5 per cent after the apparel retailer cut its 2019 profit forecast.

Overseas, the investor mood darkened further when a key measure of Chinese manufacturing activity for May disappointed, raising questions about the effectiveness of Beijing’s stimulus steps. This also sparked concerns over the health of the global economy more widely.

“It is a nasty slowdown, it looks likely to be taking longer than we thought. Many thought that the slow down would be in Q1 and the recovery in Q2, but clearly everything that we see in May is telling us this will be pushed back into Q3 or Q4,” Mr. Milligan added.

In Europe, the pan-European STOXX 600 dropped 1 per cent, slumping to a more than three-month low with the trade sensitive German DAX down 1.7 per cent. All sectors were in the red, though the declines were led by carmakers which dropped more than 2 while Volkswagen and Fiat Chrysler – both having significant exposure to Mexico – dropped 4 per cent.

Britain’s FTSE was down 1 per cent and France’s CAC fell 1.3 per cent.

Asian shares fell at first, but some drew month-end bargain hunting having endured a torrid few weeks. MSCI’s broadest index of Asia-Pacific shares outside Japan edged up 0.2 per cent, but is still down a whopping 7.4 per cent for the month.

China’s blue chip index closed a touch lower on hopes Beijing would now have to ramp up its stimulus containing losses. Japan’s Nikkei dropped 1.6 per cent, dragged down by big declines in car makers, and down 7.1 per cent on the month. Investors clearly reckoned that opening a new front in the trade wars would pressure central banks everywhere to consider new stimulus. Hong Kong’s Hang Seng was down 0.8 per cent.

Commodities

Oil fell on Friday and held on track for its biggest monthly drop in six months as comments from U.S. President Donald Trump ramped up trade tensions, weighing on the demand outlook.

Brent futures are heading for a 10-per-cent slide in May and WTI for a 13-per-cent drop, their biggest monthly losses since last November.

Front-month Brent crude futures, the international benchmark for oil prices, were at US$65.72, down US$1.15 from last session’s close.

U.S. West Texas Intermediate (WTI) crude futures were at US$55.85 per barrel, down 74 cents from their last settlement.

Both grades earlier hit their lowest since March 8.

Mr. Trump’s threats to slap tariffs on all goods from Mexico fired up fears over economic growth and appetite for oil.

“The decision, understandably, is sending shivers down investors’ spines,” PVM said in a note. “The mood is now definitely risk-off, and this is putting oil under pressure for the time being.”

“U.S. refiners import roughly 680,000 barrels per day of Mexican crude. The 5 per cent tariff adds an extra US$2-million to the cost of their daily purchases.”

Gold scaled a more than two-week peak on Friday and was en route for its first monthly gain in four after Washington’s threat of tariffs on Mexico exacerbated fears of a global economic downturn, driving investors to perceived safe havens.

Spot gold jumped 0.8 per cent to US$1,298.76 an ounce, its highest since May 15. Bullion has risen by about 1.2 per cent this month. The metal is also on track for a second consecutive weekly gain, advancing by about 1 per cent. U.S. gold futures rose 0.9 per cent to US$1,298.30.

“The extension of trade tariffs from being (only a) Sino-U.S. issue caught people by surprise,” said Ross Norman, chief executive at Sharps Pixley.

“Suspect this new development with Mexico indicates that this is not just an issue across the Pacific but could extend to the extent that global economic growth could be dented even further.”

Among other metals, silver edged 0.2 per cent higher to US$14.54 an ounce but was heading for a fourth consecutive monthly loss.

Platinum rose 0.2 per cent to US$793.26, on track for its biggest monthly loss since November 2015, down 10.5 per cent. Palladium fell 0.2 per cent to US$1,364.95.

Currencies and bonds

The Canadian dollar weakened to a five-month low against the greenback on Friday, as potential U.S. tariffs on Mexico threatened a new North American trade deal and as data showed barely any growth for the domestic economy in the first quarter.

At 9:21 a.m., the Canadian dollar was trading 0.3 per cent lower at 1.3540 to the greenback, or 73.86 U.S. cents. The currency, which was on track to fall for the fourth straight month, touched its weakest level since Jan. 3 at 1.3565.

Canada, the United States and Mexico have signed a new trade agreement, known as the United States-Mexico-Canada Agreement (USMCA), but the deal has yet to be ratified by any of the three countries.

The tariffs would raise “serious doubts about Mexico ratifying the USMCA,” said Sal Guatieri, senior economist at BMO Capital Markets in a note.

The Bank of Canada has worried that trade conflicts will hurt economic prospects. Chances of an interest rate cut this year climbed to 60 per cent from about 40 per cent on Thursday, overnight index swaps data indicated.

The U.S. dollar has itself served as a safe haven currency in recent times, but on Friday it fell as much as 0.8 per cent against the yen to 108.78, its lowest since early February, while also slipping 0.2 per cent against the euro and 0.15 per cent against a broad basket of its rivals.

Commerzbank FX strategist Ulrich Leuchtmann said the potential tariffs were particularly worrying as they didn’t seem motivated by trade imbalances.

“The U.S. trade policy has taken a qualitatively different turn. Using tariffs as a tool for non-economic goals is something which brings a new quality to proceedings,” Leuchtmann said.

“This also means that the U.S. administration is not a reliable partner in trade agreements, which the Chinese I’m sure will watch carefully,” Leuchtmann added.

The tariff threat hit the Mexican peso, which fell 3 per cent to a five-month low of 19.74 per dollar, putting it on track for its biggest daily drop since October last year.

Yields on the U.S. 10-year Treasury note quickly fell to a fresh 20-month low of 2.17 per cent. Canada’s 10-year bond yields also fell 3 per cent to 1.506 per cent.

Other corporate news

Gap Inc tumbled 14.6 per cent after the apparel retailer cut its 2019 profit forecast and posted the biggest drop in same-store sales in at least three years at its Gap brand.

Constellation Brands, which has substantial brewery operations in Mexico, dropped 5.6 per cent.

Enbridge Inc. said Thursday it could have a proposed oil pipeline tunnel built and operating beneath a crucial Great Lakes channel by early 2024, responding to demands from Michigan officials to expedite the shutdown of existing twin pipelines. Its U.S.-listed shares fell 1.5 per cent.

Uber Technologies Inc reported a US$1-billion loss on Thursday as the ride-hailing service spends heavily to build up its food delivery and freight businesses, sending revenues up 20 per cent in its first quarterly report as a public company. Its stock was up 1.9 per cent in premarket trading.

Economic news

Canada’s economy expanded at an annualized pace of just 0.4 per cent in the first three months of the year, giving the country its weakest back-to-back quarters of growth since 2015. Statistics Canada says the real gross domestic product reading for the first quarter follows a revised reading of just 0.3 per cent in the previous quarter. Canada saw substantial declines in its exports of farm and fishing products as well as a drop in crude-oil shipments. On the positive side, the agency says overall economic growth was boosted by the highest quarterly level of household spending in two years and the biggest jolt of business investment in equipment and machinery in 23 years.

Canadian producer prices increased by 0.8 per cent in April from March, driven mainly by higher prices for energy and petroleum products and pork, Statistics Canada said on Friday. Analysts in a Reuters poll had forecast a month-on-month increase of 0.3 per cent. Of the 21 major commodity groups, 10 rose, seven fell and four were unchanged. Prices for energy and petroleum rose 4.2 per cent, pushed up by a 9.2 per cent rise in prices for gasoline. Fresh and frozen pork prices posted a 11.6 per cent gain, the highest monthly jump since the 16.5 per cent leap seen in March 2014, thanks to a decrease in global hog supply driven by an outbreak of African swine fever in China. Hog prices jumped 37.8 per cent in April, the largest increase seen since January 1999. Prices for raw materials rose by 5.6 per cent, the fifth consecutive monthly gain and the largest increase since December 2016, thanks largely to higher prices for energy.

U.S. consumer spending slowed in April with inflation up, but still far below the target set by the Federal Reserve. There was a burst of spending in the prior month as well. The Commerce Department said Friday that spending increased 0.3 per cent in April following a 1.1 per cent surge in March that had been the largest increase in nearly a decade. Personal income growth, which had been lagging in recent months, jumped 0.5 per cent in April. Inflation, as measured by a gauge tied to consumer spending, increased 1.5 per cent in April compared with a year ago, up slightly from a 1.4 per cent 12-month change in April. The Fed tries to manage interest rate policy to achieve annual price gains of 2 per cent. However, through the first three months of this year, inflation fell farther from this goal.

(9:45 a.m. ET) U.S. Chicago PMI for May. Consensus is 54.0, up from 52.6 in April.

(10 a.m. ET) U.S. University of Michigan Consumer Sentiment for May. Consensus is 102.0, up from 97.2 in April.

With files from Reuters

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