24/7 Wall St.

The wide world of trade wars just got a bit more hostile. After tariffs have been imposed on inbound goods coming from China into the United States, Thursday night’s news was given a new direction after President Trump announced a 5% introductory tariff against goods coming into the United States from Mexico. This new tariff on Mexico is also set to ratchet up to 25% in 5% monthly increments, if Mexico does not make an effort to stop the flow of illegal immigrants into the United States.

With Mexico now in the mix, some companies are taking it on the chin far worse than others. 24/7 Wall St. has identified 8 serious losers that are reacting worse than their peers based on their would-be exposure to Mexico. The top exchange-traded fund (ETF) for Mexico also reacted far worse than the Dow, NASDAQ, and S&P 500.

Please Note: This article has been updated to reflect Friday’s closing prices, and a note has been added to show relative trading volume. We have also added in some industry and economist views about what the impact the tariffs against Mexico might have on the markets or the economy. Tariff uncertainty also appears to be a gift for gold investors.

The financial markets saw a midday drop in the Dow Jones Industrial Average with a loss of around 265 points (1.05%) and the decline in the S&P 500 at almost 29 points (1.05% as well). Update for Close: The Dow closed down about 355 points at 24,815.84 and the S&P 500 closed down 36.80 at 2,752.05. West Texas Intermediate crude was lower, down $1.75 to $54.84 per barrel in midday trading but it closed down $3.24 (-5.5%) at $53.35 per barrel. Where strength was found was in bonds, with the price going up pushing the yields lower (updated for close): the 10-year Treasury note was down by more than 8 basis points to a yield of 2.14%, and the 30-year Treasury yield was down 7 basis points to 2.58%.

Citigroup Inc. (NYSE: C) is a major market player in Mexico and Latin America, with more of a major international focus than most U.S. banks. Citi’s 2018 annual report talked about a growing share in Mexico in its global consumer bank efforts, and the three main strategic markets are listed as the U.S., Mexico and Asia. Citi even calls itself one of Mexico’s premier financial institutions with top brand recognition and a vast retail banking network. Its shares were down by about 2% at $62.50 in midday trading on Friday, and down from a 52-week high of $75.24.

Update for Close: Citi shares closed down 2.3% at $62.15 on 15.9 million shares (10% above average volume).

Constellation Brands Inc. (NYSE: STZ) took it on the chin due to its exposure to Mexican beers. The company’s beer brands include the various Corona labels, as well as Modelo and Pacifico. Shares saw a $12 price drop (6.4%) to $175.30 in midday trading, in a 52-week range of $150.37 to $234.26.

Update for Close: Shares of Constellation Brands closed down 5.8% at $176.45 on 6,15 million shares (about 3.5-times average daily volume).

Delphi Technologies PLC (NYSE: DLPH) faces the double whammy when it comes to tariffs. Its 2018 annual report states: “The majority of our manufacturing and distribution facilities are in countries outside of the U.S., including Mexico, China …” Its shares were down almost 6% at $15.50, in a 52-week range of $13.18 to $53.78.

Update for Close: Shares of Delphi Technologies closed down 7.3% at $15.26 on 2.28 million shares (75% above average volume).

Kansas City Southern (NYSE: KSU) is a major rail player that brings goods from Mexico into its rail hubs in the United States. While it is one of 7 Class-1 railroads in the U.S., Kansas City Southern de México, S.A. de C.V. is one of two large regional railroads in Mexico and KCS also owns 50% of the Panama Canal Railway Company in Panama. The 2018 annual report shows that its combined North American rail network is roughly 6,700 route miles linking commercial and industrial markets in the United States and Mexico. Its shares were down 5.5% at $112.25. That is down about 11% from its 52-week high of $112.95 as well.

Update for Close: Kansas City Southern’s shares closed down 5.54% at $113.28 on 2.83 million shares (175% higher than its average volume).

Rockwell Automation Inc. (NYSE: ROK) does business in 80 countries, according to its annual report. Its 2018 annual report shows that, outside of the United States, on a country-of-destination basis its top markets are China, Canada, Mexico, Italy, the United Kingdom, Germany and Brazil. Its largest square footage of manufacturing space (at 630,000) was listed as being in Monterrey, Mexico. Shares were down 4.2% at $148.75, with a $17.6 billion market cap. The 52-week trading range is $141.46 to $198.23, and shares were last seen down 25% from its 52-week high.

Update for Close: Rockwell Automation shares closed down 3.15% at $90.40 on 10.05 million shares (only about 75% of an average day’s trading volume).

Southwest Airlines Co. (NYSE: LUV) recently expanded into Mexico and the Caribbean after years and years of having only domestic flights. The airline is one we have flagged as a would-be winner with zero flights over China, but tensions rising with Mexico may bite further into the airline than in years past, at the same time it deals with the 737 MAX groundings. With more than 4,000 flights per day during peak travel seasons, the airline flies passengers and cargo into and out of multiple cities in Mexico. Southwest Airlines was last seen down 2.3% at $48.26 a share, in a 52-week range of $44.28 to $64.02. That is down 25% from its high.

Update for Close: Southwest Airlines’ shares closed down 3.6% at $47.60 on 5.05 million shares (15% above average volume).

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.