A Latin American stocks benchmark fell and most Latin American currencies softened against the dollar on Friday after Mexico fell in the cross-hairs of US President Donald Trump's tariffs. Aiming to stanch the flow of illegal immigrants to his country, Trump on Thursday threatened tariffs on imports from Mexico starting on June 10, starting at 5% and increasing monthly up to 25% on Oct. 1. Mexico's deputy foreign minister termed the threat a "cold shower". "Nearly 80% of Mexican exports go to the U.S," said Gabriela Soni, UBS Global Wealth Management's chief investment officer for Mexico.
The probability of tariffs ramping up to the maximum 25% was just 20%, she said, because Mexican companies are providing substitutes for some goods that the United States would normally import from China, with whom Trump is engaged in an escalating tit-for-tat tariff trade war.
Soni said her base case - which she accorded an 80% probability to - is that Trump will not act on his threat. In that case the peso will still depreciate to about 20 pesos per dollar over the next six months, due to factors such as slower Mexican growth and fiscal deterioration. MSCI's index of Latin American stocks fell 0.5%, while its Latin American currencies index dipped 0.1%.
Mexican stocks slid 1.4%, largely on losses among financials and materials, while the peso softened 2.3%. The move comes at a bad time for Mexico, as international investors have already been scaling back exposure to the country's equity market. Lipper estimates show US-domiciled investors yanked money out of a popular Mexico-focused ETF in each of the last four weeks ended Wednesday, the day before Trump's threat.
Tremors from Trump's threat were felt in markets from Japan to Europe, while the cost of insuring exposure to Mexico's sovereign debt rose to a two-month peak. While Brazil's real firmed 1.5%, stocks on the Bovespa fell 0.6%, weighed on by losses in the energy sector as Brent crude futures shed 3.6%. Common shares and preferred shares of state-run oil firm Petroleo Brasileiro SA (Petrobras) tumbled 1.9% and 2.3%, respectively.
Miner Vale SA fell 2.5%, with Dalian-traded iron ore futures having lost ground earlier in the global day. Argentina's stocks fell 1%, while the peso weakened 0.5%. Colombia's peso softened 0.4%, taking monthly losses to about 3.4%. The country's central bank said it has suspended its accumulation of foreign reserves so it can evaluate the impact of dollar-buying on the peso exchange rate. Stocks slipped 0.7%, with oil firm Ecopetrol SA down 2.3%, weighed on by the softer crude futures.