8 Major Losers From the Mexico Tariffs

United States Steel Corp. (NYSE: X) has been downgraded and downgraded further by Wall Street analysts, and its Mexico angst may simply be from the ongoing steel wars getting worse. U.S. Steel’s 2018 annual report discussed an impact of Mexico and Canada imposing 25% tariffs on imports of U.S. steel, but the annual report also noted that U.S. Steel completed a sale of its interest in Acero Prime that had four locations in Mexico. Shares hit a 52-week low of $11.70 on Friday, and the midday level was down 3.5% at $11.78. This also is down about 70% from its 52-week high of $38.89. When Hyman Roth told Michael Corleone in the Godfather trilogy “We’re bigger than U.S. Steel,” it was impressive, but with a market cap of just $2 billion now it isn’t so impressive.

Update for Close: U.S. Steel shares closed down 3.2% at $11.82 on 14.99 million shares (about 28% above average volume).

Valero Energy Corp. (NYSE: VLO) has exposure with Mexico, as do other refineries, by refining domestic and foreign product in the Gulf Coast region and shipping that product out, and Valero’s 2018 annual report warns that any attempts by the U.S. government to withdraw from or materially modify existing international trade agreements could adversely affect its business along with disclosures around tariffs, NAFTA and USMCA. Its stock almost challenged the 52-week low of $68.81 earlier in the day. Valero’s shares were last seen down 3.8% at $70.09, and that is almost 45% lower than the 52-week high of $126.98. Will investors care that the dividend yield is now up to 5.1% because the stock has fallen so much?

Update for Close: Valero closed down 3.4% at $70.40 on 5.42 million shares (48% above average volume).

To show just how bad things can be in the world of ETFs for broader exposure, the iShares MSCI Mexico ETF (NYSEARCA: EWW) was last seen down by 4% at $42.75. It has a 52-week range of $37.50 to $53.06. This is a far larger loss than the U.S. indexes.

Update for close: The iShares Mexico Capped ETF closed down 3.64% at $42.94 on 7.76 million shares (about 114% higher than average daily volume).

The credit market strategy team at Merrill Lynch outlined how one trade war is OK but not two trade wars. While the team finds it unlikely that a deal between the U.S. and Mexico will not be agreed upon, two trade wars will make it difficult for even investment grade credit to perform well. Their report outlined some impact:

This was unexpected not the least because Trump the same day took steps to accelerate the approval of USMCA… Compared with China we think Mexico should be much more incentivized to agree to a deal with the US resolving the tariff situation sooner rather than later, due to its smaller size, outsized dependence on the US and relative lack of geopolitical complications. We also expect much more US resistance against tariffs on Mexico. As such we would be surprised if these new tariffs went into effect. If they did the impact would no doubt be slower US economic growth. When our economists recently analyzed the impact of no trade deal between the US and China they said 2020 growth of “low-1%” handle vs. their forecast of 1.8%. We are not economists but can imagine a full blown trade war between the US and Mexico could potentially be just as impactful. The scenario with both China and Mexico trade wars at the same time seems to us one with a likelihood of recession too high for even investment grade credit to perform well.

Jack McIntyre, a portfolio manager on the Global Fixed Income team at Brandywine Global with approximately $57.1 billion in assets under management, outlined that 17% of Detroit cars are actually made in Mexico and that a $1,500 rise on average car prices could trigger a drop-off in U.S. car sales. He further said:

The bottom line is this threat hurts the U.S. economy via consumer spending getting hit. The resulting uncertainty may mean more postponement in capital expenditures (capex). It will be interesting to see how China interprets these latest developments, although they certainly could misread the situation as they’ve done in the past. While Republicans, not just Democrats, will need to push back on this latest tariff threat, the market will have the biggest influence on Trump… Lastly, this latest development gives investors another reason to expect Treasury yields to decline and increases the odds that the Fed cuts rates. We’ve seen a big increase in market probabilities for rate cuts based on this latest tariff threat.

A statement was issued by the Texas-Mexico Trade Coalition in Austin, Texas. Chairman Eddie Aldrete is not for the actions announced at all and he outlined that trade and immigration are entirely separate issues and he outlined some of the expectations along with the China issues:

The economic consequences of Trump’s new plan could be swift and severe, especially in Texas. Companies that import products pay tariffs, so U.S. firms would pay the import penalties and then likely pass at least some if not all of the costs along to consumers. Additionally, the administration’s movement to impose tariffs undermines the same administration’s effort to get Congress to ratify the U.S.-Mexico-Canada Trade Agreement… As a country, we buy more from China, but we sell more to Mexico. Tariffs on Mexico are not a sustainable strategy. Mexico exported $346.5 billion in goods to the United States last year, from vehicles to fruits and vegetables. Many manufactured items also cross the border several times as they are being assembled at plants in both Mexico and the U.S. This essentially means U.S. companies could potentially pay tariffs multiple times for one product.