Stocks up, bond yields fall as tensions ebb
INVESTORS WELCOME END TO ITALY CRISIS, IGNORE SPAIN ISSUES
World stocks rose and bond yields fell yesterday as investors welcomed the apparent end to a political crisis in Italy and shrugged off a change in Spain’s leadership, although prospects of a full-blown trade war curbed the gains.
The MSCI All-Country World index, which tracks shares in 47 countries, rose 0.3 per cent. It was set for a third week of losses, however, brought on by the risks of a snap election in Italy.
Late on Thursday, leaders of Italy’s anti-establishment parties revived coalition plans, apparently ending three months of political turmoil. The new government was being installed yesterday.
Italian stocks rallied 2.6 per cent, the standout performers in Europe. The political crisis knocked more than 9 per cent off the Italian benchmark in May, its worst month since June 2016. The pan-European STOXX 600 rose 1.1 per cent.
Borrowing costs in Italy also fell. Italian two-year yields, which soared to five-year highs above 2.7 per cent on Tuesday, retreated to Monday’s levels.
Investors seemed to ignore a change in leadership in Spain, where Pedro Sanchez replaced Mariano Rajoy as prime minister after Rajoy lost a no-confidence vote in parliament on Friday. Sanchez and most Spanish parties are pro-European, so investors see less political risk there than in Italy.
Spain’s 10-year government bond yield dropped 13 basis points to a two-week low of 1.36 per cent.
“The parties leading in the polls in Spain are centrists, so we’re not getting the proposals for fiscal extremes as we have in Italy,” said Michael Metcalfe, head of global macro strategy at State Street Global Markets Futures showed US stocks were set to open higher.
Renewed trade tensions
Of potentially greater concern to investors was the renewed prospect of a global trade war after the United States imposed steel and aluminium tariffs on Canada, Mexico and the European Union.
Canada and Mexico retaliated with levies on billions of dollars of US goods from orange juice to pork. The European Union was set to tax bourbon whiskey and Harley Davidson motorcycles.
The US announcement pushed stocks lower, although a weaker yen supported Japanese stocks and firm exports boosted South Korean markets.
MSCI’s broadest index of AsiaPacific shares outside Japan rose 0.1 per cent but remained down roughly 0.6 per cent for the week.
“In the short term, the immediate economic impact [of tariffs] may well be limited as we’ve known these have been coming for some time, which may have given companies time to build up some inventory,” wrote Michael Hewson, chief markets analyst at CMC Markets in a note to clients.
“However, the decision to retaliate by the EU, Canada and Mexico on a range of other US goods, could well lead to a further escalation in the days ahead.” The Shanghai Composite Index fell 0.5 per cent and the blue-chip CSI300 index dropped 0.75 per cent. Traders said Chinese stocks were volatile as the long-awaited inclusion of largecap shares from the country in MSCI’s emerging markets index had failed to buoy the market or attract immediate flows of foreign money.
Yesterday, about 230 yuandenominated mainland A-shares were included in MSCI index for the first time.