No question about it, the president's decision to impose 5 percent tariffs on all Mexican imports by June 10 caught investors flat-footed. Combined with the on-going war of words with the Chinese on tariffs, markets worldwide fell sharply this week. Is a relief rally in the cards?

 

Chances are that next week, we should see a rebound. How much and over what period of time will largely depend on what happens next on the trade front. My thinking on the Mexican issue thus far is this: Trump is using trade with Mexico to force their government to turn back (instead of encouraging) Latin American refugees from our border.

 

You may disagree, but I believe President Trump's heavy-handed actions toward Mexico over the past two years has resulted in the immigrant problem we have today. By "Making America Great Again" at the expense of every other nation on earth (with the possible exception of Russia), Trump has broken, reduced, and/or trashed past agreements, both spoken and unspoken, by our former allies, which includes Mexico.

 

In the case of Mexico, for years we had successfully enlisted their cooperation in turning back refugees at their borders from Latin America and, where they could, reduce the number of their own citizens from entering the U.S. illegally. It was not a perfect solution, and a steady trickle of refugees continued to find their way over our borders, but it was manageable. Trump, recognizing that he could use immigration as a campaign issue among a certain segment of the population, hammered Mexico unrelentingly.

 

Why, under those circumstances, would any country continue to cooperate voluntarily with the U.S. and our protectionist president? They did what made the most sense for them, just like Trump does for his base. They simply stepped aside and let the flood gates open.

 

Unable to stem the tide, our immigration force is drowning. Donald Trump is using economic trade to force a solution to a problem of his making. Although Mexican leaders have responded by taking a hard stance, I suspect that Trump will get his way, at least temporarily.

 

The markets expect the same. Mexico, unlike China, cannot afford a protracted trade war with its neighbor and largest trade partner. It is one reason stocks on Friday were "only" down one percent or so. Given that the administration has also started the ratification process on the new, Mexico-Canada-U.S. trade agreement this week, it seems obvious that Trump is injecting immigration into what until now been a purely economic agreement.

 

China, as I warned last week, continues to ramp up its hardline response to U.S. trade demands. The administration's moves against Huawei, China's telecom behemoth, have now elicited a response. China's Ministry of Commerce is reported to be compiling a list of "unreliable entities." These are companies and individuals that have cut off business with Chinese companies (like Huawei). It confirms investors' worst nightmares, sending semiconductor and other technology stocks lower.

 

In addition, China is threatening retaliation on other fronts. China accounts for 80 percent of the production of rare earth, used in the manufacture of things like cell phones, rechargeable batteries, DVDs, computer memories and much more. It has floated a veiled threat to cut off exports to the U.S. in the future. That would cripple production across a wide range of American industries.

 

In the short-term, we can expect to see the S&P 500 Index test the 2,700 level, give or take 25 points. That would still leave the entire pullback from the highs no more than about 8 percent. Pundits may make a big deal about breaking through the S&P's 200-day moving average (DMA), but I believe it will rebound. This decline is perfectly reasonable after the double-digit gains we have enjoyed since December.