By Joyce Yu
Philadelphia, PA–Worries over a Sino-US trade war rekindled after the White House announced Tuesday that it will go ahead with imposing 25% tariffs on $50 billion worth of Chinese goods. This, together with Italy’s on-going political crisis, fueled risk-off mood in the stocks market. U.S. stocks slumped more than 300 points in morning session on the first trading day after Memorial Day long weekend.
The White House’s announcement comes a week after China and the U.S. agreed to cease fire in trade dispute following two rounds of high level negotiations. China agreed to increase purchases of U.S. agriculture and energy products, and last week, the U.S. Commerce Department told lawmakers it had reached a deal to put Chinese telecommunications firm ZTE Corp. However, the ceasefire lasted just a week. In addition to tariff hike, the White House further said in its statement it will announce investment restrictions and “enhanced export controls” for Chinese individuals and entities “related to the acquisition of industrially significant technology” by the end of June.
The latest development has exacerbated today’s fall in stocks market which is largely triggered by Italy’s political crisis. Italy has been struggling to establish a government since inconclusive elections in March, with anti-establishment forces abandoning their effort to form a ruling coalition over the weekend. This is followed by the appointment of former International Monetary Fund official Carlo Cottarelli as interim prime minister on Monday with a task to try and form a new government and bring order to political and constitutional turmoil.
“The kick-off to a shortened trading week is looking ugly as Italy’s political woes weigh heavily on the global markets,” Peter Cardillo, chief market economist at Spartan Capital Securities in New York, told CNBC. “A crisis of confidence for the euro seems almost inevitable, which is fortifying the greenback and sending bond yields lower as the safety trade overrules.”
The risk-off attitude has bolstered demand for safer asset classes, including U.S. and German Treasurys. The rate on the U.S. 10-year note fell to 2.86% Tuesday, down from highs above 3% in recent weeks, which has in turn added to pressure on price of bank shares. Big banks like Citigroup, Morgan Stanley and Bank of America all fell roughly 2% Tuesday.
Analysts noted Italy, as the third largest economy in the eurozone, accounts for 15% of the region’s GDP, much bigger than Greece, the source of the last eurozone crisis.”In Italy, in the short-run, the status quo prevails, [but] if elections strengthen the hand of populist parties on the left or the right, there’s danger of a more radical response,” said David Kelly, chief global strategist at JPMorgan Funds. That could be “fiscally dangerous, given how much debt Italy already has.”
He added, “I think default risk, however, is still extremely low. Italy could not possibly default on their debt without an entire collapse of their economy. ”
