Trader Peter Tuchman works on the floor of the New York Stock Exchange, Tuesday, May 29.Richard Drew/The Associated Press
Volatility returned to Wall Street with a vengeance on Tuesday, with downbeat guidance on trading from JP Morgan and worries over Italy putting the S&P and Dow Jones Industrial Average on track for the biggest one-day drop in a month.
Political crisis in Italy triggered a rush to safe-haven assets as the prospects of a repeat election in euro zone’s third largest economy raised doubts about the country’s future in the economic bloc. Some major bank stocks sank as much as 5 per cent after JP Morgan corporate and investment bank chief Daniel Pinto suggested second-quarter markets revenue would be flat on the year, driving 1.7-per-cent and 1.2-per-cent falls in the Dow and the S&P, respectively.
If the losses sustain to the closing bell, those would be the biggest daily falls since April 24 and the first of more than 1-per-cent drop in May. “Notwithstanding what the banks themselves are saying, I’m actually a bit skeptical about loan volume growth in a high rate environment,” said Peter Cecchini, Managing Director and Chief Market Strategist at Cantor Fitzgerald in New York.
“And you see the yield curve flattening, the two 2-10 spread to closest to the flattest to the year, and that’s bad for the profitability of the banks.”
The Dow dived below its 50-day moving average, a key technical level that represents short-term momentum, for the first time since May 9, while the S&P 500, which opened below its 100-day moving average, was only a few points away from breaching that level.
Yield on the benchmark U.S. 10-year Treasury notes yield fell to their lowest level since mid-April to 2.84 per cent.
“There’s been a bit of a pullback in yields and obviously with the contraction on the curve, there could be implications from a financial standpoint in terms of the banks’ businesses that are tied to interest rates,” said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management in Chicago.
At 2:07 p.m. ET, the Dow Jones Industrial Average was down 463.02 points, or 1.87 per cent, at 24,293.40, the S&P 500 was down 4.20 points, or 1.48 per cent, at 2,680.98 and the Nasdaq Composite was down 60.68 points, or 0.82 per cent, at 7,372.70.
Canada’s main stock index also slipped lower on Tuesday due to losses in financial stocks led by Bank of Nova Scotia , which reported quarterly results.
The Toronto Stock Exchange’s S&P/TSX composite index down 87.05 points, or 0.54 per cent, to 15,929.10.
The financials sector fell 1.7 per cent, dragged by a 3.6-per-cent fall in shares of Bank of Nova Scotia.
Shares of Toronto-Dominion Bank slipped 1.4 per cent and were the second biggest drag to the financials.
The energy sector climbed 0.6 per cent as Brent crude pared losses, triggered by expectations that Saudi Arabia and Russia could pump more crude to compensate for a potential supply shortfall.
Shares of Kinder Morgan Canada Ltd erased early gains and fell 1.8 per cent after the Canadian government said it will buy the Trans Mountain pipeline project for $4.5-billion.
The materials sector, which includes precious and base metals miners, added 1.2 per cent after gold prices edged up as a deepening political crisis in Italy provoked a second day of heavy selling on European financial markets
The Canadian dollar weakened to a more than two-month low against its U.S. counterpart as oil prices fell and the greenback broadly rose, while investors weighed a decision by Canada’s government to purchase a major oil pipeline project.
Short-dated Italian bond yields - a sensitive gauge of political risk - soared as much as 150 basis points to their highest since 2013 in their biggest move in 26 years .
The euro dropped towards $1.15 for the first time this year, down 0.8 per cent on the day. Against the Swiss franc , it fell to 1.15 francs.
Stocks in Milan slid 2.3 per cent on the main index after a 2.1-per-cent fall on Monday. Bank shares slumped more than 4 per cent after losing the same amount in the previous session, bruised by the sell-off in government bonds, a core part of bank portfolios.
Adding to the uncertainty in Europe, Spanish Prime Minister Mariano Rajoy will face a vote of confidence in his leadership on Friday.
Spain’s bond-yield spread with Germany also went to its widest this year at 132 bps. Madrid’s IBEX bourse was down 2.2 per cent.
Asia flinched, too. Japan’s Nikkei slipped 0.6 per cent. Chinese and Hong Kong shares ended 0.6 to 0.7 per cent in the red.
The dollar was up against almost all major currencies except the safe-haven Japanese yen.
The U.S. currency is heading for its best month since late 2015 - a move that is hurting many emerging market countries that borrow in dollars.
“The biggest contributor is fear of a euro zone crisis, and the spillover from that into demand for safe-haven currencies,” said Koon Chow, an FX strategist at UBP.
Away from Europe, the focus was on the on-again, off-again U.S.-North Korean summit and the U.S.-China trade relationship.
An aide to North Korean leader Kim Jong Un arrived in Singapore on Monday, Japanese public broadcaster NHK reported, and the White House said a “pre-advance” team was travelling to the city to meet the North Koreans.
The reports indicate that planning for the summit, initially scheduled for June 12, is moving ahead even though President Donald Trump called it off last week. A day later, Trump said he had reconsidered, and officials from both countries were meeting to work out details.
Italian Prime Minister-designate Carlo Cottarelli will see the President Sergio Mattarella at 4:30 p.m. (1430 GMT), the president’s office said in a statement.
Mattarella effectively vetoed a coalition government of the anti-establishment 5-Star Movement and League party at the weekend. He has asked Cottarelli to form a stop-gap government to lead the country to early elections instead. Cottarelli is expected to announce his cabinet after the meeting.
Oil struggled to rebound to the near-four-year highs it set earlier in the month. Crude is under pressure from expectations that Saudi Arabia and Russia would pump more oil, even as U.S. output rises.
That has pushed the spread between Brent and U.S. crude to nearly $9 a barrel, its widest since March 2015 because of the depressed price of U.S. crude compared with Brent.
U.S. crude fell 1.87 per cent to $66.61 per barrel and Brent was last at $75.42, up 0.13 percent on the day.
Reuters