The cautious push higher by European bourses in early trade on Thursday was short lived, as US trade tariffs and trade war fears brought investors tepid optimism crashing back down. The US looking to impose aluminium and steel tariffs on Canada, Mexico and EU raises the risk of trade wars with its allies, in a move that could risk global economic growth.
Failure of negotiations between the US and these countries to result in a deal means the levies of 25% will be slapped on steel and 10% on aluminium. The Dow dived 1% in early trade, whilst European bourses came off early highs and moved into the red, illustrating the danger that investors perceive this move by the US poses on global economic growth. Any tit for tat response from the countries involved will lower potential economic growth, in a worse case scenario leading to a global recession.
Whilst the dollar remained steady on the trade tariff news, the euro has fallen back from its earlier high. Stronger than forecast inflation data and receding concerns over Italy had helped the euro climb back above $1.17. However, the latest on potential US trade wars has pulled the common currency firmly lower.
Politics remain in focus in Italy
Continued dialog between the League and the 5 Star Movement initially increased investor optimism that a coalition government could still be formed, avoiding any destabilising elections. The fate of Italy is currently in the hands of the League’s leader who must decide whether or not to accept a compromise to launch a populist government. Whilst the FTSE MIB started the day full of optimism and on the front foot, it has since declined as nerves are once again starting to show. Traders are going to remain extremely sensitive to the developments in Italy with the formation of a coalition government without Eurosceptic Paolo Savona as the best market outcome; at the other end of the scale, with a snap election we expect to see the FTSE MIB sell off continue and the euro come under further pressure.
And Spain…
Political drama in Spain intensified sending the IBEX over 1.2% lower. Prime Minister Rajoy’s government is set for collapse as a majority forms against him. Mariano Rajoy could decide to resign over the coming hours or face being kicked out. The most probable outcome here will be elections in Spain. Whilst this in itself it not a huge problem, the extra political risk at a time when populism is once again on the rise in Europe adds another layer of concern for the markets.
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