At the open: Wall Street starts lower on renewed trade war concerns

Wall Street falls on Italy worries; bank shares drop
May 29, 2018
Peter Cardillo from Spartan Capital on CEO Money
June 4, 2018

At the open: Wall Street starts lower on renewed trade war concerns

Canada’s main stock index opened lower on Thursday, weighed down by losses in financial stocks.

At 9:30 a.m. ET, the Toronto Stock Exchange’s S&P/TSX composite index was down 65.47 points, or 0.41 per cent, at 15,983.19.

U.S. stocks slipped on worries of a looming trade war with the European Union that outweighed optimism over renewed efforts in Italy to form a government.

The Dow Jones Industrial Average fell 46.99 points, or 0.19 per cent, at the open to 24,620.79. The S&P 500 opened lower by 3.03 points, or 0.11 per cent, at 2,720.98. The Nasdaq Composite dropped 6.87 points, or 0.09 per cent, to 7,455.58 at the opening bell.

Washington is set to announce plans to slap tariffs on EU steel and aluminum imports as early as Thursday morning, sources said, while the U.S. commerce secretary said any escalation of their trade dispute would depend on the bloc’s reaction.

Shares of Steel Dynamics, AK Steel and US Steel gained between 2.6 per cent and 7 per cent and aluminum maker Alcoa fell 0.7 per cent.

Another big gainer was General Motors, which surged 10.8 per cent after Japan’s SoftBank Group decided to invest $2.25 billion in its autonomous vehicle unit.

Friction between the United States and its trading partners have roiled financial markets, especially after U.S. President Donald Trump in March decided to impose 25 pe rcent tariff on steel imports and a 10 per cent tariff on aluminum.

“If it (tariffs) happens, eventually that could be a problem because we have to see retaliation. For now, it’s already in the markets,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York.

“Basically there is a sense of relief that Italian situation is not going to lead to a major euro crisis.”

Markets rebounded on Wednesday, with the S&P 500 recovering its losses from the previous session, helped by renewed efforts to form a government and avoid new elections.

World stocks, the euro and Italian bonds all made a second day of gains on Thursday, after renewed efforts from politicians in Rome to form a government and data from China had pointed to its giant economy performing well.

The moves meant Milan’s bourse was 0.7 per cent higher, Britain’s FTSE and France’s CAC added 0.2-0.4 per cent though Germany’s DAX stalled after a report that Mr. Trump aims to push German carmakers out of the United States.

Italy’s 2-year government bond yield, which has been the focus of a selloff, was down as much as 95 basis points at just over 1 per cent, while the euro climbed to $1.1690 after its biggest jump since early January on Wednesday.

Rome’s benchmark 10-year bond yield was down 33 bps at 2.68 per cent too and the closely watched Italy/Germany 10-year bond yield spread tightened to 248 bps, as much as 22 bps tighter than the previous day’s close.

“It seems at least the 5-Star movement is making an effort to form a government. Apparently they have been given a day to try,” said ING strategist Martin Van Vliet.

“The market is just rallying hoping that new elections may avoided.”

Asia’s mood overnight had been lifted by data showing growth by China’s vast manufacturing sector accelerated strongly and well above forecasts in May to an eight-month high.

It gave bluechip Chinese shares their best day since August 2016 with gains of just over 2 per cent.

Hong Kong’s Hang Seng rose over 1 per cent too and MSCI’s broadest index of Asia-Pacific shares outside Japan made 0.8 per cent as it clambered off near two-month lows.

“We have about 25 percent in Asia,” said Jake Robbins, a global equities fund manager at Premier Asset Management. “China is the second biggest economy in the world and it is growing very, very quickly.”

Tokyo’s Nikkei meanwhile added 0.8 per cent, helped by a settling of the yen which has been drawing in buyers during the recent rise in Italian and euro zone uncertainty.

The euro’s rise came as two polls in Italy showed 60-72 per cent of respondents wanted the country to remain part of the euro. The prospect that populist parties there could push to leave the currency is the big concern for financial markets.

French inflation data also rose to its highest level since August 2012 coming a day after Germany’s figure had also past the European Central Bank’s target of just under 2 per cent after hitting its highest in more than a year.

The dollar index which measures it against a basket of six other major world currencies dipped 0.3 per cent to 93.830 having surged to a near seven-month peak of 95.025 on Tuesday amid the Italy troubles.

U.S. Treasury yields moved up from April lows hit this week to 2.87 per cent, though there were a number of geopolitical events to navigate.

U.S. Secretary of State Mike Pompeo and high-ranking North Korean official Kim Yong Chol will hold a second day of meetings in New York later as they try to set the stage for an historic summit between their two leaders next month.

China meanwhile had lashed out on Wednesday at renewed threats from the White House on trade, warning that it was ready to fight back if Washington was looking for a trade war, days ahead of a planned visit by U.S. Commerce Secretary Wilbur Ross.

Brent crude prices reversed earlier losses to hit their biggest premium to U.S. futures in over three years on Thursday, as the prospect of more inventory increases weighed heavily on West Texas Intermediate prices.

Brent crude futures had risen 70 cents on the day to $78.42 a barrel, while U.S. West Texas Intermediate crude was down $1.1 to $67.11 a barrel.

That pushed the premium of Brent to WTI beyond $11 a barrel, the largest since March 2015. That spread has doubled in less than a month, as a lack of pipeline capacity in the United States has trapped a lot of output inland.

“The Brent/WTI is blowing out. I think there must be what looks like some capitulation going on in the spread between those two contracts,” Saxo Bank senior manager Ole Hansen said.

The wider premium makes U.S. crude exports more competitive than those linked to the Brent price, such as North Sea or West African grades of oil.

U.S. crude stockpiles rose by 1 million barrels in the week to May 25, according to the American Petroleum Institute (API). Analysts had expected a drop of 525,000 barrels, which dented U.S. futures earlier in the day.

Brent meanwhile slid to a three-week low below $75 a barrel on Monday after the Organization of the Petroleum Exporting Countries and its non-OPEC allies including Russia indicated they could adjust their deal to curb supplies and increase production.

Sources told Reuters that Saudi Arabia, the effective leader of OPEC, and Russia were discussing boosting output by about 1 million barrels per day (bpd) to compensate for losses in supply from Venezuela and to address concerns about the impact of U.S. sanctions on Iranian output.