“Risk-On Mood in Equities Falters; ECB Sinks Bonds: Markets Wrap.”
Trade hopes and the end of easy money were the twin themes in trading on Wednesday, with stocks fluctuating near recent highs and bonds falling as this week’s risk-on mood endured.
U.S. equities pared gains after opening higher following advances across Asia on signs that major economies will step back from the brink of a trade war. The Stoxx Europe 600 Index slipped as a strengthening euro provided a headwind and as Italian shares fell. Both were reacting to signs that the ECB is ready to discuss an end to quantitative easing, which sank bonds in the region and spurred fears for Italy’s embattled lenders. The British pound strengthened as the U.K.’s main opposition party pushed for a soft Brexit.
The dollar stayed lower after the U.S. trade deficit narrowed to the lowest level since September thanks to record exports. Most metals rallied and 10-year Treasury yields climbed above 2.95 percent after China was said to offer to buy more American products and on reports the Treasury Department favors less sweeping investment limits on the Asian nation.
Investors have been here before: The on-again, off-again threat of protectionism is becoming a common refrain in global markets. They’ll now look ahead to the G-7 meeting this week for further developments in the story, as well as to this month’s meetings of both the Federal Reserve and the European Central Bank for more clues on monetary policy. ECB chief economist Peter Praet on Wednesday confirmed next week’s gathering will be pivotal for a decision on when to end its bond-buying program.
“EU plans to hit U.S. imports with duties from July.”
The European Union expects to hit U.S. imports with additional duties from July, ratcheting up a transatlantic trade conflict after Washington imposed its own tariffs on incoming EU steel and aluminum.
EU members have given broad support to a European Commission plan to set 25 percent duties on up to 2.8 billion euros ($3.3 billion) of U.S. exports in response to what is sees as illegal U.S. action. EU exports that are now subject to U.S. tariffs are worth 6.4 billion euros.
The plan includes duties of between 10 and 50 percent on a further 3.6 billion euros of U.S. imports in March 2021 or potentially sooner if the World Trade Organization has ruled the U.S. measures illegal.
U.S. products on the list include orange juice, bourbon, jeans, motorcycles and a variety of steel products. The European Union, Canada and Mexico have all responded after U.S. President Donald Trump last Friday ended their exemptions from tariffs of 25 percent for steel and 10 percent for aluminum.
Canada has announced it will impose retaliatory tariffs on C$16.6 billion ($12.9 billion) worth of U.S. exports from July 1. Mexico put tariffs on American products ranging from steel to pork and bourbon on Tuesday. Some of the products chosen are designed to target states of senior Republicans who are seeking to retain control of both chambers of Congress in hotly contested November elections.
The European Commission launched a legal challenge against the U.S. tariffs at the World Trade Organization last Friday. It is also assessing the need for measures to prevent a surge of imports of steel and aluminum into Europe as non-EU exporters divert product initially bound for the United States.
“World Bank warns trade tensions could cause 2008-level crisis.”
A worldwide escalation of the trade tensions between the US and its major trading partners would have consequences for global trade equivalent to the 2008 financial crisis, the World Bank has warned.
Using conservative estimates to assess the risks to the world economy from rising economic nationalism of the kind promoted by Donald Trump, the Washington-based organisation warned of “severe consequences” for world trade and economic growth, with the harshest impact reserved for developing nations.
Under the scenario outlined in its latest global economic prospects report published on Tuesday, the bank found a broad-based increase in the use of import tariffs worldwide – to the maximum levels permitted by the World Trade Organisation – would trigger a decline in global trade amounting to 9%.
While that would be similar to the drop experienced during the financial crisis of 2008-09, it warned the impact could be even greater if countries went further than the WTO rules.
Franziska Ohnsorge, the lead author of the bank’s report, said: “The threat of trade protectionism is a real risk. Anything that puts sand in the wheels of global trade is a risk to global growth.”
“ECB’s Praet Confirms June Meeting Pivotal as Inflation Picks Up.”
European Central Bank chief economist Peter Praet confirmed that next week’s policy meeting will be pivotal for reaching a decision on when to end the institution’s bond-buying program.
His comments reinforce the view that the Governing Council is close to settling the question of how long it will continue to buy debt to support the euro-area economy. Members anticipate a fully fledged discussion that could conclude with a public announcement on when they intend to cease purchases, according to euro-area officials familiar with the matter.
“It’s clear that next week the Governing Council will have to make this assessment, the assessment on whether the progress so far has been sufficient to warrant a gradual unwinding of our net asset purchases,” Praet said in a speech in Berlin on Wednesday.
The euro rose 0.3 percent to $1.1754 as of 10:15 a.m., gaining for a third day. The single currency jumped on Tuesday after Bloomberg reported on the council’s expectations for the June 14 meeting.
Praet also said “waning market expectations of sizable further expansions of our program have been accompanied by inflation expectations that are increasingly consistent with our aim.” In addition, inflation signals “have been improving.”
The remarks are significant because Praet crafts the policy proposals for the Governing Council. Asset purchases are currently scheduled to run until at least September.
Policy makers are likely to treat next week’s gathering as an opportunity to debate winding down bond-buying, said officials, who asked not to be named because such matters are confidential. Still, it’s possible nothing will materialize. President Mario Draghi may use his press conference to signal an announcement will come in July, one of the people said. An ECB spokesman declined to comment.
Even just having the conversation though would be a significant leap forward on the path to unwinding unprecedented stimulus, after months in which the ECB avoided formally addressing the matter. In April, Draghi kept the Governing Council’s deliberations away from the future path of monetary policy despite a plea from Austria’s Ewald Nowotny to the contrary.