By CCN: After the stock market closed Wednesday, traders got a shock. The past two days have been a celebration. The Dow catapulted more than 700 points higher as the Fed offered life support to the market. But the party ended abruptly Wednesday evening as attention snapped back to the trade wars.
Dow Jones futures dropped as much as 120 points following reports that Mexican trade negotiations had stalled. Meanwhile, the S&P 500 futures were trading 10 points, or 0.4%, lower, at last check.
Trump Says Mexico Isn’t Making Enough Progress, Dow Sinks
While President Trump has been in the UK on a state trip this week, he is keeping up with trade negotiations. He took to Twitter after the market closed Wednesday to give his latest take:
Negotiations are ongoing. But with Trump sticking to his guns, the odds of a deal before Monday are fading. Not surprisingly, the market including the Dow took this news poorly.
Mexico Faces Stiff Pressure if It Can’t Make a Deal
Mexico will certainly be pushing for a deal by Monday if at all possible. The country faces problems on several fronts. For one, the Mexican peso has sunk more than 3% since Trump announced the new tariff plan last week. The peso dropped another half percent Wednesday evening.
Additionally, credit ratings agencies are getting nervous. On Wednesday, both Moody’s and Fitch took ratings actions against the country. Fitch dropped the country from BBB+ to BBB, putting it just two rungs above junk territory. Moody’s kept its rating stable but lowered its outlook for Mexico to negative, suggesting that a downgrade could be imminent. Mexico will have to spend more on interest payments for its debt as its credit rating falls.
Rate Cut Hopes Takes a Back Seat as Risk Returns
Investors seemingly forgot all about the trade wars this week, choosing instead to focus on the prospect of the Fed shoring up the stock market. But rate cuts aren’t particularly bullish; they have often led to punishing stock market declines. As it is, the factors that drove the stock market down more than 6% in May haven’t gone away.
Until there is more clarity on the prospects for global trade, stock investors should buckle up for a lot more volatility. Don’t forget about the potential for the government’s antitrust campaign against big tech to slam stocks. And a CCN report also pointed to global growth concerns and Iran as additional risk factors.