May 30, 2018
United States:
Stocks Drop, Bonds Rally as Italy Woes Jolt Assets: Markets Wrap
U.S. stocks tumbled the most in more than a month, joining a global equity selloff sparked by concern Italy’s political woes will destabilize Europe. Treasuries surged, oil plunged and the yen rallied. Selling in American equities picked up pace after European shares closed with the worst drop since March. Bank shares paced the rout as the 10-year Treasury yield sank as much as 17 basis points, the most since the U.K. voted to exit the European Union in June 2016. The dollar climbed as the euro plunged to its lowest since July 2017. Stock volatility soared and investors sought haven assets from the yen to the Swiss franc. The prospect that Italy might need a fresh election that could be a referendum on the nation’s inclusion in the euro zone rattled global financial markets. While U.S. assets looked like they’d avoid the worst of the selling, the risk-off tone gripped investors as Europe staggered to an ugly close. Investors are also keeping an eye on geopolitical issues, with the Trump administration giving conflicting signals on talks with North Korea and plowing ahead with plans for tariffs on Chinese goods. Political turmoil in Italy is rekindling memories of the euro zone’s woes of the past decade, and caution is spilling over into global markets. Pro- and anti-European forces are at loggerheads in Rome, with another election expected as early as September after parties failed to form a government in the wake of a poll in March. “The political situation in Italy is troublesome and then you get broader concerns about the strength of the euro market in general and that in turn has some people thinking maybe the Fed here in the U.S. slows down on raising rates,” Peter Jankovskis, co-chief investment officer at Oakbrook Investments, said by phone. “That’s been a big pillar for the financials overall, that rates will continue to rise and their margins will continue to improve because of that.”
Europe:
Italy Bonds Pass Auction Test in a Sign of Easing Market Jitters
Italy successfully sold five- and 10-year debt at an auction, bring some relief to jittery markets following this week’s meltdown in the nation’s bonds amid a political crisis. Both auctions were oversubscribed by investors, buoyed by large reinvestment flows from a bond maturing later this week. Still, the pricing of the longer-dated note showed signs of the pessimism that has battered the market this week. The average sale price on the 10-year bond was 25 cents below the secondary-market level just before the bidding deadline. A similar gauge for the five-year one was 24 cents higher. “You have an underbidding of 25 cents on the 2028 and an overbidding of 24 cents on the 2023 issue, so a mixed message,” Marc-Henri Thoumin, a strategist at Societe Generale SA, said in emailed comments. “They have issued much less than the 4 billion euro target it seems, but it is not necessarily a big deal.” The debt office sold 1.82 billion euros worth of 2028 notes with a bid-to-cover ratio of 1.48, the highest this year. It issued 1.75 billion euros of 2023 ones with a bid-to-cover of 1.53. Demand at the auction may have been buoyed by reinvestments of more than 20 billion euros of cash flows from a bond redemption and coupon payments. Italian securities held earlier gains following Tuesday’s rout that saw 66 billion euros ($77 billion) wiped off in market value. In the secondary market, 10-year yields dropped 28 basis points to 2.88 percent as of 12:36 p.m. in London, having hit 3.44 percent Tuesday, the highest level since 2014. Those on five-year notes fell 83 basis points to 2.21 percent. “Given the brutal concession that was built in for this sale yesterday and the fact that there are 20 billion euros of redemptions this week, it’s hardly indicative of a rush to buy,” said Marc Ostwald, a strategist at ADM Investor Services. “The political backdrop is still a thick fog.”
Italy’s Credit Impulse Doesn’t Bode Well for the Economy
To see how the turmoil in Italy is affecting the economy, the change in the stock of loans to households and non-financial corporations may provide more insight on the expansion of gross domestic product than the actual growth rate, according to Bloomberg Economics. The three-month average stood at minus 2.6 percentage points in April and Italy was already alone among the euro area’s four largest economies in making a negative contribution to the aggregate figure. Still, the latest number is far from the minus 10.4 percentage points registered in May 2012.
Asia:
China Slams Trump’s ‘Flip-Flop’ on Tariffs as Trade Spat Worsens
China hit back at U.S. President Donald Trump’s plan to push ahead with tariffs on $50 billion of Chinese imports despite a recent truce in the trade fight, saying it damages America’s standing. If the U.S. insists on unilateral measures, China will respond accordingly, foreign ministry spokeswoman Hua Chunying told reporters in Beijing on Wednesday. The White House said in a statement on Tuesday that a final list of imported goods to be targeted will be released by June 15, and levies imposed “shortly thereafter.” “Every flip-flop in international relations simply depletes a country’s credibility,” Hua said. Earlier, the Wall Street Journal reported that the trade talks between the two countries scheduled for June 2 in Beijing may be derailed by the fresh threat from Washington. The announcement by Trump — which seemed to tear up an agreement reached only 10 days ago in Washington — is the latest twist in a trade dispute between the U.S. and China that has rattled financial markets for months and could threaten the broadest global upswing in years, according to the International Monetary Fund. A team of U.S. officials was scheduled to arrive in Beijing on Wednesday to discuss the broad outline of the next round of talks, but if the two sides failed to reach agreement on what would be discussed, the trip — led by Commerce Secretary Wilbur Ross — could be canceled, the Wall Street Journal report said. Asian equities slid Wednesday as the renewed tension over trade added to concerns over Italy’s political turmoil for investors.