Hope that the US would not impose tariffs on Mexican imports starting June 10 led to parallel rallies in the Mexican peso and the S&P 500 in New York’s Tuesday session.

The S&P’s 6% decline during May began when the Trump Administration claimed that China had reneged on commitments already made in trade negotiations, and then imposed a ban on sales of American components to China’s national champion telecommunications company Huawei. It accelerated when President Trump announced that he would start imposing tariffs on all Mexican imports unless Mexico staunched the flow of Central American immigrants to the United States.

Reports from Mexican officials that the tariffs might be avoided sparked the biggest US stock market rally since early January, with beaten-up semiconductor and automotive stocks in the lead. Autos would be worst hit by tariffs on Mexico, which sells about $40 billion of auto parts to the United States. Semiconductors are most at risk in a prospective tech war with China, because Asia accounts for more than half the sales of America’s most innovative chipmakers.

What spooked and then encouraged the market was not the prospective economic damage from Mexican tariffs, but rather the startling behavior of the Trump Administration. The President evoked emergency powers to threaten tariffs that would rise from 10% to 25% between June and October, using a 1977 law that has never been used for this purpose.

He also did so while the US-Mexico-Canada Agreement is before the US Congress. Trump ditched the painfully-negotiated revamp of the North American Free Trade Agreement to make a point about immigration policy, an unprecedented action that followed another unprecedented action, the ban on exports to Huawei. The latter aggression came in the absence of any complaint against the Chinese company except the threat that it would dominate 5G mobile broadband.

The Mexican peso and the S&P 500 rallied Tuesday morning after Mexico’s president and foreign minister both expressed confidence that they would reach an agreement with the Trump Administration to avoid the tariffs. Republican Senate leaders, meanwhile, threatened to block the move. According to The Hill, a meeting Tuesday of Republican senators showed unanimous opposition to Trump’s threat. Republican leaders reportedly are preparing a disapproval vote if the Administration doesn’t walk the tariffs back.

As I wrote earlier this week, investors are making book on President Trump’s proximity to the ledge. The threat to Mexico had no precedent in US economic policy, or for that matter in the policy of any major nation after World War II. Coming in the midst of congressional deliberation over a trade treaty with Mexico, it called into question the good faith of the United States as a negotiating partner.

Markets still could be disappointed. Mexico’s Foreign Minister Marcelo Ebrard said in Washington Tuesday that the chances of avoiding tariffs were 80%, but with most of the Trump team traveling in Europe, Ebrard hasn’t had much to do.

He met with Commerce Secretary Wilbur Ross, who has no authority in the matter, and US Trade Representative Robert Lighthizer, who reportedly opposed the tariffs in the first place, along with most of Trump’s advisers. The president doesn’t return to Washington until the end of the week after D-Day commemoration ceremonies in France.

Equities remain vulnerable to new shocks if President Trump sticks to his guns against Mexico. The Federal Reserve can’t do much to help. Fed Chair Jerome Powell and Vice-Chair Richard Clarida both indicated that the central bank might cut rates if the economy weakens, but markets already have priced in 50 basis points of short-term rate reduction this year. Fed funds futures fell after Powell’s remarks, which falsifies the hypothesis that expected Fed ease provided support for stocks in today’s rally.

Economic data meanwhile continue to weaken. Deflated capital goods orders (excluding aircraft and defense) are now negative year-on-year.