“‘Goldilost’ Grips Markets as Turkey, Italy Expose Fractures.”
If the world’s financial markets were vulnerable going into this week, they look a whole lot worse with an extra handful of risks thrown onto the fire.
Political turmoil from Turkey to Italy is adding to the burden investors face as they grapple with the end of easy money conditions. A selloff in emerging markets is being exacerbated by the risk of contagion from Turkey’s currency crisis, European credit markets are feeling the strain caused by Italy’s incoming populist government, and North Korea tensions are again wreaking havoc in stock markets.
As the Turkish lira’s selloff picks up steam, the currency’s demise is beginning to seep into sentiment toward other emerging markets. That’s a problem because developing nations are already on shaky ground due to the dollar’s month-long surge and a pick-up in global borrowing costs. Countries that, like Turkey, have persistent current account deficits will come under most pressure, James Bevan, chief investment officer at CCLA Investment Management, told Bloomberg TV’s Francine Lacqua on Wednesday.
European investors got a double-whammy of bad news this week as concern over Italy’s spending plans collided with data showing economic momentum in the euro area cooled yet again in May. It doesn’t help that the dollar has resumed its upward trajectory after a two-day break from gains. The result was a plunge in the common currency to the lowest level since November versus its U.S. counterpart, with neighbors from Sweden’s krona to Poland’s zloty sliding in sympathy. German bonds surged, sending five-year yields to the lowest since January, while government debt from Italy and Portugal sank.
Stocks in Europe and Asia fell as investors swapped relief at easing Sino-U.S. relations for renewed concern about North Korea. During his Oval Office meeting with South Korea President Moon Jae-in Tuesday, President Donald Trump cast doubt on a possible summit with North Korea’s Kim Jong Un, sending U.S. shares lower. Earlier in the day, stocks had rallied following signs that China’s trade tensions with the Trump administration were easing.
“Small banks trump Wall Street on Dodd-Frank rewrite.”
Congress on Tuesday rolled back some of the restraints imposed on banks after the 2007-2009 global financial crisis, but big players like Goldman Sachs Group Inc (GS.N), Morgan Stanley (MS.N) and JPMorgan Chase & Co (JPM.N), will not be breaking out the champagne.
While Wall Street banks lobbied hard for a range of provisions that would have weakened the 2010 Dodd-Frank reform law and boosted their profits, they got trumped by their smaller rivals, according to lobbyists, Congressional staff, bankers and disclosure records.
For example, the bill reduces federal oversight of banks between $50 billion and $250 billion in assets, and eases lending, capital and trading rules for smaller lenders, but big bank lobbyists and analysts agree it does little to help the nation’s largest lenders.
Large banks sought to raise that oversight threshold to $500 billion, or adopt a more flexible approach to big bank scrutiny, but small banks fought to fix the cap at $250 billion, concerned about alienating Democrats whose votes were needed to pass the bill in the Senate.
But while Trump-appointed regulators have been cutting Wall Street some slack in how they apply the rules, the rewrite showed how small banks outmaneuvered their big rivals on Capitol Hill, where Wall Street is still struggling to shake off its negative image. One such accomplishment was the change in the bill that eased capital, lending and trading rules based on asset-size limits, rather than by firm type or activities, making it tougher for big banks to sneak in under the radar. In many cases this was set at $10 billion.
“Pound weakens after unexpected UK inflation fall.”
The pound fell to its lowest level this year on Wednesday, after the release of data showing UK inflation unexpectedly fell for the second consecutive month in April.
Figures published by the Office for National Statistics showed the annual change in the consumer price index fell to 2.4 per cent during the month of April, from 2.5 per cent in March. Economists had forecast it would remain unchanged.
Sterling dropped following the release, with the pound trading down as much as 1 per cent against the dollar to around $1.3303, the lowest level since December 2017.
Rising inflation was the most visible economic effect of the 2016 Brexit vote, as the fall in the pound led to higher import prices. But inflation is now falling faster than some economists had forecast, raising questions over the timing of any increase in interest rates and the extent of domestic inflation pressure.
“The latest data are further confirmation that inflation remains on a downward path,” said Suren Thiru, head of economics at the British Chambers of Commerce. “The increase in producer prices may lead to a short-term uptick in inflation over the coming months, but it is likely to be a temporary rise with the rate continuing its overall trend back towards the Bank of England’s 2 per cent target,” he added.
“Stocks Retreat Globally as Dollar Gains With Bonds: Markets Wrap.”
U.S. stocks edged lower following drops in Asia and Europe as data cast doubts on growth prospects for the euro area while political tensions increased in North Korea and Italy. Ten-year Treasury yields briefly dipped below 3 percent, while the dollar climbed.
The S&P 500 Index slipped for a second day after closing Monday at the highest since March, while the Stoxx Europe 600 Index sank the most in two months as optimism over U.S.-China trade talks faded along with prospects for President Donald Trump’s summit with North Korea’s leader. Concerns over Turkey’s financial stability drove the lira to a record low and weighed on emerging-market assets. The yen jumped as traders sought havens.
The euro fell to a six-month low as manufacturing data added to concern growth is slowing, while the pound weakened as U.K. inflation trailed expectations, denting prospects for rate increases. The dollar rose to the strongest since December as investors got a mixed picture on the health of U.S. consumers from a host of retailer earnings. Tiffany & Co. surged as sales blew away estimates, while Target Corp. tumbled after its profit missed forecasts.
Monetary policy may provide a welcome distraction when the Federal Reserve releases minutes of its latest meeting Wednesday. Just as trade tensions between the U.S. and China seemed to be easing, Trump appeared to express pessimism on a meeting with Kim Jong Un, while in Italy questions are swirling around the populist government’s economic policies. The U.S. president kept up his attacks on Special Counsel Robert Mueller’s investigation, warning of a “scandal the likes of which this country may never have seen before.”