“Stocks Fall on Trade Risk; Dollar Strength Hits EM: Markets Wrap.”
Investors were greeted by a sea of red across global equities markets Monday, as U.S. and European stocks followed a slump in Asia at the start of a crunch week for global trade. Political risks sent the dollar higher with Treasuries, roiling emerging markets.
All major U.S. equity gauges were lower to start the second half of the year, led by the Nasdaq 100 Index, which struggled as semiconductor stocks fell. Energy shares also were weak, weighing on the S&P 500 Index and Dow Jones Industrial Average. On Friday, the S&P 500 capped the second quarter with its third straight monthly gain.
“Trade and tariff tensions continued to weigh on global equities as well as emerging market currencies,” John Stoltzfus, the chief investment strategist at Oppenheimer & Co., wrote in a note to clients Monday. “This is likely to persist particularly as the July 6 deadline looms for the Trump Administration’s planned imposition of tariffs.”
Emerging-market stocks retreated, giving up almost half of Friday’s gain, while developing-nation currencies also fell. Mexico’s peso reversed gains following the country’s presidential elections. Earlier, benchmarks in Japan, China and South Korea tumbled. The MSCI Asia Pacific Index fell to its lowest level since in 10 months. The yuan weakened, resuming its sharpest drop since China’s August 2015 devaluation.
Britain’s pound declined in yet another big week for Brexit, and the euro came under pressure as tensions deepened in the German coalition. Miners were the biggest losers in Europe as metals slid, and West Texas oil fell below $74 a barrel after U.S. President Donald Trump called for increased production.
“Report of Trump bill rejecting WTO seen by trade experts as hot air.”
U.S. President Donald Trump has ordered the drafting of legislation that would mean abandoning key disciplines agreed at the World Trade Organization, Axios news website reported late on Sunday, to a skeptical response from trade experts. Axios reported on Friday that Trump wanted to leave the WTO, a story dismissed by U.S. Treasury Secretary Steve Mnuchin as “wrong” and “an exaggeration”.
The website followed up on Sunday by publishing what it said was a draft bill, the “United States Fair and Reciprocal Tariff Act”, immediately drawing ridicule for legislation that would be known by its acronym, the FART Act.
The act would allow Trump to ignore the WTO’s “most favored nation” principle, which stops countries trading on different terms with different trading partners unless they have a formal trade agreement, Axios said.
It would also allow “reciprocal tariffs”, so Trump could impose U.S. tariffs on particular goods equal to the tariff charged on U.S. exports of those goods by another country.
Trump has caused a crisis in the WTO by blocking the appointment of new trade judges, threatening to destroy the system of binding dispute settlement. But many diplomats say quitting the WTO would not be in the U.S. interest, and the WTO has said it has never had any indication of Trump intending to leave.
“Syria war: 270,000 displaced by fighting in south-west.”
At least 270,000 people have fled their homes in south-western Syria since the military launched an assault on rebel-held areas two weeks ago, the UN says. Many of those displaced by the fighting in Deraa and Quneitra provinces have headed towards the borders with Jordan and the Israeli-occupied Golan Heights.
But neither country has said it will allow an influx of refugees, sparking fears of a humanitarian «catastrophe». Government forces have been advancing with the help of Russian air strikes.
On Sunday, rebels in the major town of Bosra al-Sham reportedly agreed to lay down their arms and accept President Bashar al-Assad’s rule. More than 130 civilians have been killed since hostilities escalated, according to the Syrian Observatory for Human Rights, a UK-based monitoring group.
Deraa and Quneitra had been relatively calm for almost a year because of a «de-escalation» agreement brokered by the US and Jordan, which support the opposition, and Russia, a staunch ally of the government. But Mr Assad set his sights on regaining full control of the provinces after defeating rebels in the Eastern Ghouta region outside the capital Damascus in April.
UN officials estimated only six days ago that up to 50,000 people had fled their homes in rebel-held towns and villages in response to the government’s intense air and artillery strikes. By Monday, the figure was more than five times higher.
“European Banks Exploit a Weakness to Cut $145 Billion in Trades.”
Some of Europe’s biggest banks may have found a perfectly legal way to exploit a weakness in one of the finance industry’s most loathed rules.
Euro-area and Swiss lenders cut their short-term borrowings by tens of billions of dollars just before the end of each quarter, improving their reported financial health, only to build them up again in the following weeks, according to the Bank for International Settlements. BNP Paribas SA, Credit Agricole SA and Societe Generale SA regularly shrink such trades, U.S. statistics show.
Almost a decade after the global financial crisis, lenders in Europe may be taking advantage of a loophole in the implementation of a key reporting requirement that aims to curb the amount of debt banks take on. While U.S. and U.K. banks must use an average figure over the quarter when reporting the measure, known as the leverage ratio, the Europeans only have to report numbers for the end of a quarter, enabling them to apply “window dressing,” according to a BIS report last month.
“It allows banks to provide a picture of their own state to the market that is distorted,” said Francesc Rodriguez-Tous, a finance professor at City University in London. “The leverage ratio is precisely there to ensure that banks don’t game the system.”
The BIS report points to the $1 trillion U.S. market for short-term collateralized loans known as repurchase agreements, or repos, a segment that provides a glimpse into how banks fund themselves. In a typical deal, a bank borrows cash by selling U.S. Treasuries to a money-market fund and agreeing to buy back the securities the following day. Banks can also use the borrowed cash to make loans through trades known as reverse repos.