Asian stocks continue downslide amid geopolitical worries
Hong Kong’s Hang Seng Index HSI, -2.28% fell 2.3%, while the Nikkei Stock Average NIK, -0.66% shed 0.7%, with metals-related stocks extending declines on fears of a U.S.-led global trade war.
Also pressuring Japanese equities again was fresh strength for the yen, which was broadly up about 0.25% Monday morning versus other major currencies. It was around ¥105.50 per dollar USDJPY, +0.18% after sitting at its strongest level in 16 months in late New York trading Friday.
The euro was slightly higher against the U.S. dollar and British pound. The common currency strengthened after Germany’s Social Democrats voted to support a coalition government, allowing Angela Merkel to serve a fourth term as chancellor. The single currency initially eased as Italian results showed a likely hung parliament.
Italian exit polls so far suggest a series of potential coalitions that would find it difficult to agree, said Megan Greene, chief economist at Manulife Asset Management. The results were likely to produce a “messy confusion,” she added, though that had largely been anticipated by investors. “We may see a little volatility and a moderate rise in Italian yields.”
In other Asian stock markets, South Korea’s Kospi SEU, -1.13% fell 1.1% as index heavyweight Samsung Electronics 005930, -1.78% dropped 1.8%. Australia’s benchmark XJO, -0.57% fell 0.6%, Singapore’s index STI, -1.17% lost 1.2% and early gains in Taiwan were lost by midmorning. The Shanghai Composite closed up 0.1%.
Earlier Monday, China’s government said its 2018 economic-growth target would remain around 6.5% for 2018 as it predicted a reduced budget deficit. It also said it would cut excess capacity in the steel sector by 30 million metric tons and by 150 million in coal
China avoided setting an explicit growth target for credit for the first time this century, said Hao Zhou, senior emerging markets economist for Asia at Commerzbank. This is also the first time since 2012 that China has reduced its deficit target.
“China has set a generally tightening policy tone for the coming year, and financial deleveraging will take the center stage,” he said. “As such, we believe that the market has somewhat underpriced the downside risks for China’s economy this year.”
Still, China’s goals of pursuing growth and curbing leverage would likely prove more difficult to manage this year given the threat of trade protectionism, said Patrick Bennett, head of macro strategy for Asia at CIBC.
Chinese stocks SHCOMP, +0.07% ended up by 0.1% It had fallen intraday after a private-sector gauge of the nation’s service sector eased slightly in February.
Euro slides after populist parties make strong showing in Italian election
What are currencies doing?
The euro EURUSD, +0.0812% dropped to $1.2308, down from $1.2321 late Friday in New York. Against the pound, the shared currency EURGBP, -0.3136% slipped to £0.8919, from £0.8927.
The ICE U.S. Dollar Index DXY, -0.05% rose 0.2% to 90.089, rebounding from a 0.4% loss on Friday. That move came as traders worried that President Donald Trump’s plans for aluminum and steel tariffs will lead to a global trade war. The broader WSJ U.S. Dollar Index BUXX, +0.03% was up 0.1% at 83.86 on Monday.
The pound GBPUSD, +0.3695% rose marginally to $1.3806 from $1.3802 late on Friday.
Meanwhile, the dollar lost ground against the yen USDJPY, +0.22% with the greenback buying ¥105.70, compared with ¥105.74 on Friday.
Against the Canadian dollar USDCAD, +0.7529% the buck rose to C$1.2975 up from C$1.2884 late Friday.
What is driving the markets?
The dollar, which had been in focus over Trump’s comments on impending steel and aluminum tariffs late last week, has stepped back out of the spotlight, as traders focused on political developments in Europe. The official announcement of new wide-ranging tariffs is expected for later in the week though, when the dollar should come back into the foreground.
The buck fell for two days late last week after Trump revealed the new levies, adding in a tweet that “trade wars are good, and easy to win.” On Monday, the president tweeted about the tariffs with respect to Canada and Mexico, indicating neither would be exempted unless a renegotiated Nafta deal is signed.
Meanwhile, the euro declined as it became clear the Italian election had produced no clear winner, but showed a surge in support for antiestablishment, euroskeptic parties.
The 5 Star Movement—one of Europe’s largest populist parties—is set to emerge as the biggest party, with around one-third of the vote. The far-right Lega Nord was expected to come in third, just behind the ruling Democratic Party.
The result suggests a coalition will be needed for a government to formed, but none of the potential coalition groups appear to have enough support to avoid a hung government. That means Italy could be facing a period of political wrangling and uncertainty as the parties try to hammer out a coalition deal.
Germany was left in a similar situation after the general election in September gave no party an outright majority. Only this weekend did the government makeup fall into place. The Social Democratic Party on Sunday agreed to go into a coalition with Angela Merkel’s conservative Christian Democratic Union in a members vote, ending five months of uncertainty in Europe’s largest economy.
What are strategists saying?
• “The big takeaway from these [Italian] elections has been the extent to which the Italians have fallen out of love with the EU, voting in favor of far-right and antiestablishment parties,” said Jasper Lawler, head of research at London Capital Group, in a note.
“Sweeping gains by antiestablishment, euroskeptic parties, such as the 5 Star Movement and the Lega Nord, highlight the discontent felt by Italians over high levels of immigration and unemployment in Europe’s third-largest economy. All the more surprising, given that Italy is one of the founding members of the EU and has traditionally been one of its strongest supporters,” he added.
• “A broad grand coalition would be well received by markets, as it could result in political stability and fiscal discipline. Repeat elections could prolong uncertainty and weigh on Italian assets,” said Matteo Ramenghi, chief investment officer for Italy at UBS Wealth Management.
“An antiestablishment alliance of M5S and Lega, the worst-case scenario for markets, looks unlikely due to different programs,” he added.
What else could drive markets?
In the U.S., a duo of readings on the services sector are slated to hit in the morning. At 9:45 a.m. Eastern Time, the Markit services PMI for February is scheduled for release, followed by the ISM nonmanufacturing data for the same month at 10 a.m. Eastern.
Dow closes 336 points higher as trade-war worries ease
The Dow Jones industrial average closed 336.70 points higher at 24,874.76 after dropping as much as 150 points. Caterpillar was the biggest contributor of gains to the Dow, rising 3.2 percent.
The S&P 500 rose 1.1 percent to 2,720.94 after briefly trading lower, with utilities as the best-performing sector. Harley-Davidson, a closely watched stock amid the tariff news, rose 2.4 percent. The Nasdaq composite advanced 1 percent to close at 7,330.70.
"Seeing Caterpillar and Harley-Davidson trade higher tells me that traders think this will end diplomatically," said Quincy Krosby, chief market strategist at Prudential Financial. She also noted that the President Donald Trump's comments on NAFTA showed "flexibility" on his part.
Trump appeared to be opening the door for negotiations on tariffs. In a series of tweets Monday morning, Trump said: "Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed," adding that "Mexico must do much more on stopping drugs from pouring into the U.S. They have not done what needs to be done."
Also, House Speaker Paul Ryan said he was "extremely worried" about Trump's trade plan. Congressional leaders will not rule out potential action if Trump decides to move forward with his tariff plan.
Trump announced last week the U.S. will implement a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports. The news sparked fears of a potential global trade war as world leaders condemned the announcement. In response to the U.S. tariffs, the European Union proposed tariffs on Harley-Davidson bikes and other U.S. products.
"We're in an uncertainty zone with investors asking: 'What's going on?' with regards to protectionism and trade," said Mike Bailey, director of research at FBB Capital Partners. "The first instinct seems to be risk-off as people buy into the bond proxies like utilities."
Equities fell following Trump's announcement, with the Dow closing 420 points lower on Thursday. The S&P 500 and Nasdaq also closed lower that day.
Investors also looked to Mexico City as U.S., Mexico and Canada officials gathered for the last day of this round of negotiations. Both Canada and Mexico are threatening to retaliate if the U.S. moves forward with its steel and aluminum tariffs.
"If tariffs are announced but keep NAFTA partners in scope, this would break with recent precedent, given that the steel tariffs under President Bush did not apply to Canada and Mexico," said Michael Zezas, managing director at Morgan Stanley, said in a note. "Markets may have to reflect some increase in the probability that NAFTA talks fail."
In corporate news, French insurer AXA is buying XL Group for $15.3 billion, or $57.60 a share, in a deal that would create a property and casualty insurance giant. XL shares rose 29 percent on the back of the news.