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Inventories began in 2019 with the fastest start of the three decades, as the economy was growing faster than expected, the Federal Reserve seemed to give up its plans to continue to raise interest rates and the reproaches of the trade war between Washington and Beijing seemed to end.
As of April 30, the S & P 500 had reached a record.
Then, the tweets on the trade began, sending the markets in free fall which ended Friday with a 1.3% decline of the S & P 500. The benchmark ended the month of May in down 6.6%, its first monthly decline and the biggest drop since a nasty sale at the end of 2018.
Friday's drop came after President Trump announced that Washington would impose a new tariff on all imports from Mexico – a tax of up to 25% – unless the country's government takes steps to counter the flow of migrants across the United States. Beijing has announced plans to unveil a blacklist of foreign companies and people.
The Chinese Ministry of Commerce did not name the companies on the list, nor announce what would happen to them, but this is a reprisal against the Trump government, which has refused US technology to Chinese companies.
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Friday's trading appeared to be an appropriate conclusion to a drop that began earlier this month after Trump, on Twitter, threatened new tariffs on Chinese products.
In the meantime, problems seemed to be increasing every week, with tariffs rising, discussions giving no significant results and growing threats. Then, the White House issued an order effectively banning the sales of Huawei, China's largest network company, which widened the conflict and reduced trade deficits to the difficult problems of technological dominance.
"I think in a sense, Huawei's ban was a bigger deal," said Maneesh Deshpande, market strategist at Barclays in New York. "It really opened a new front in the trade war."
Investors around the world have responded by taking into account the growing economic cost of the fight. Stock markets in trade-dependent economies, such as Japan, South Korea and Germany, also experienced heavy losses in May.
On Friday, the fall in US stocks was drastic: investors underestimated industrial and machinery stocks, shares in consumer products companies and giant tech companies.
Companies with strong ties to Mexico have suffered from the threat of new tariffs. Large builders, with complex supply chains crossing the border between Mexico and the United States, have been particularly hard hit. Ford was down 2.3% and General Motors down 4.3%.
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Constellation Brands, the brewer of Corona and other Mexican beer brands, lost about 5.7%. JPMorgan Chase analysts estimate that over 70% of its sales come from products imported from Mexico.
Kansas City Southern, a railroad company that operates a large petroleum and motor vehicle transportation business across the southern border, dropped 4.5%.
The peso fell sharply, dropping 2.5% against the US dollar.
The catalyst linked to Mexico was new, but the recession was in line with the broader signals sent by the markets this month, suggesting a growing weakness in the global economy.
US crude oil benchmark prices fell more than 5% on Friday and more than 16% over the month. Iron ore and copper, industrial metals closely linked to China's growth prospects, fell after a key economic report showed that Chinese factory activity was contracting in May.
The growing risks to global growth seem somewhat at odds with many recent reports suggesting substantial strength in the US economy. At 3.6%, unemployment remains at its lowest level since 1969. Wages are rising sharply. And corporate profits remain high. During the reporting season of the recently completed first quarter results, approximately 75% of companies exceeded the expectations of Wall Street analysts.
But this month, healthy fundamentals have been drowned out by the increasing volume of trade, as investors are increasingly concerned about any sign of slowing growth.
Government bond markets have sent some of the strongest warning signals. A global The decline in long-term interest rates observed this month, generally seen as a sign of threat to growth, began to trouble Wall Street investors.
It continued on Friday, with the 10-year Treasury yield falling to 2.13%, according to Bloomberg, its lowest level since September 2017.
To a certain extent, these low yields reflect rising expectations that the Federal Reserve will reduce interest rates. According to the Fed Funds Futures Market, traders expect the Fed to cut interest rates by around 90% by the end of the year, compared with around 38% in mid-April .
Expectations that the Fed is ready to support financial markets – an opinion the central bank has never fully endorsed – have probably dampened equities to some extent this month. But this also probably means that investors will be more and more sensitive to the indications as to whether interest rate cuts will materialize in the coming months.
Markets say "there is no inflation and your policy is too strict and you need to start thinking about reducing interest rates," said James Bianco, president of Bianco Research, a company of economics consulting in Chicago. "Now, I think the hand of the Fed is a little forced."
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