Early gains in benchmark U.S. indexes faded and global stock markets retreated Tuesday as concerns about Italy’s budget and the fate of U.S.-China trade talks continued to weigh on investor sentiment, pushing safe haven U.S. Treasury yields to their lowest levels since October 2017.
Markets had been cheered by limited gains for nationalists in the EU elections, though wins for euroskeptic parties in Italy, France, Poland and would-be ex-member Britain, as well as snap elections in Greece and political turmoil in Austria, curbed risk appetite.
Italy’s dispute with the European Commission, however, emerged to dominate European trading as markets opened. The commission could fine Italy 3 billion euros for accumulating debt and deficits that break EU rules, Italian Deputy Prime Minister Matteo Salvini said on Tuesday.
“It reopens the whole agenda of whether Salvini wants to be part of the euro or not,” said Colin Harte, portfolio manager and strategist at BNP Paribas Asset Management.
“The danger is that the (dispute between Salvini and the EU) turns out to be more aggressive on both sides, then you will see people switch out of positions,” Harte said.
Canada’s main stock index fell on Tuesday, as losses in the energy and health care sectors weighed.
The Toronto Stock Exchange’s S&P/TSX Composite index was unofficially down 49.20 points, or 0.3 per cent, at 16,297.46.
Eight of the index’s 11 major sectors were lower.
Energy stocks dropped 1.1 per cent with Enerflex Ltd. falling 6.3 per cent and MEG Energy Corp. down 5.8 per cent.
Health care stocks were down 1.4 per cent, including a 5.7-per-cent decline by Bausch Health Companies Inc. and 4.9-per-cent loss for Aphria Inc.
In the United States, the Dow Jones Industrial Average fell 237.18 points, or 0.93 per cent, to 25,348.51, the S&P 500 lost 23.8 points, or 0.84 per cent, to 2,802.26 and the Nasdaq Composite dropped 29.66 points, or 0.39 per cent, to 7,607.35.
The pan-European STOXX 600 index lost 0.22 per cent and MSCI’s gauge of stocks across the globe shed 0.09 per cent.
High-grade euro zone bond yields were lower across the board in a risk-off environment, with the ousting of Austrian Chancellor Sebastian Kurz adding to nervousness.
U.S. yields were also lower. Benchmark 10-year Treasury notes yielded 2.26 per cent, down six basis points. The U.S. Treasury Department sold five-year government notes on Tuesday at a yield of 2.065 per cent, the lowest yield for 5-year Treasuries since October 2017.
Trade worries remained high. U.S. President Donald Trump said on Monday that Washington was not ready to make a deal with China, but that he expected one in the future. At the same time, he pressed Japanese Prime Minister Shinzo Abe to reduce Japan’s trade imbalance with the United States.
Hope for a U.S.-China trade agreement still underpins optimism in global markets.
“Markets are holding their nerve and will start to attach great hope to the meeting between Presidents Xi and Trump in June,” said BNP Paribas’ Harte. “But I’m not as convinced that Trump wants a deal.
“The big risk is that the U.S. starts being disruptive to supply chains ... and the big problem is we don’t really understand how much damage this will do.”
Auto stocks rose globally after Fiat Chrysler confirmed it had proposed a merger with Renault, a deal that would create the world’s third-biggest carmaker. The rally spilled into Asia with Mitsubishi Motors Corp 7211.T in Japan adding 5.95 per cent and Nissan Motor Co 7201.T gaining 2.31 per cent.
The dollar index, which tracks the U.S. currency against a basket of six other major currencies, rose 0.17 per cent higher at 97.782.
U.S. crude futures gained almost 1 per cent on Tuesday after flooding throughout the Midwest constrained crude flow from the main U.S. storage hub in Cushing, Oklahoma.
U.S. West Texas Intermediate (WTI) futures settled at $59.14 a barrel, up 51 cents, or 0.9 per cent, from its close on Friday before the long Memorial Day holiday weekend.
“Flooding seems to have impacted distribution hubs around the United States, slowing stuff coming out of Cushing and creating a bid on WTI,” said Phillip Streible, senior market strategist at RJO Futures in Chicago.
Flooded areas of Arkansas and Oklahoma were bracing for more rain that will feed the already swollen Arkansas River, forecasters said on Tuesday. Up to 19 inches (48 cm) of rain have fallen so far in parts of Oklahoma over the month of May, the National Weather Service said, with more on the way.
Meanwhile, Brent crude futures settled flat at $70.11 a barrel, after repeatedly veering above and below the $70-mark.
Prices had been caught between fears of slowed economic growth and expectations that the Organization of the Petroleum Exporting Countries (OPEC) and its allies will extend their six-month deal to curb production.
OPEC and its allies including Russia, known as OPEC+, are due to meet over June 25-26 to discuss output policy, but it remains unclear whether their production pact will be extended.
Reuters