Global stocks shake off fresh Trump tariff threats and populist vote in Italy
Trump tariffs may be headed for substantial dilution
Global stocks shake off fresh Trump tariff threats and populist vote in Italy — The global markets early Monday were thrown off balance by fresh trade threats from President Trump and by the strong showing of populists in Sunday’s Italian election. However, sentiment improved by midmorning and the S&P 500 index on Monday closed the day sharply higher by +1.10%. The Euro Stoxx 50 index closed the day up +0.92%. The Nikkei index on Monday closed -0.66% lower but rallied by +1.9% early Tuesday after seeing Monday’s recovery in the U.S. and European stock markets.
The Italian markets initially took the election news hard with the FTSE MIB stock index initially plunging by -2.1% and posting a new 6-month low. However, the MIB index then recovered and closed near the day’s high, down by only -0.42%. Italy’s 10-year government bond yield rose by as much as +11 bp during the day but then fell back and closed the day only moderately higher by +4 bp at 2.00%. The 10-year Italian bond yield spread over German bunds rose by only +4.3 bp to 135.7 bp, which was a lower spread than seen just last week.
Sunday’s Italian election produced the following preliminary results in the lower house with nearly all of the vote counted: (1) center-right coalition 37.0% (17.4% for the League, 14.0% for Berlusconi’s Forza Italia, and 4.4% for Brothers of Italy, and 1.3% for Us With Italy-UDC), (2) Five Star Movement 32.7%, (3) center-left coalition 22.9% (18.7% for the Democratic Party, 2.6% for More Europe, 0.6% for South Tyrolean People’s Party, 0.5% for Together Italy Europe, and 0.4% for Civic Popular Lorenzin); and (4) 7.5% for other parties.
The markets were a bit alarmed by the strong showing by the populist parties of Five Star (32.7%) and the League (17.4%), which together might have a narrow majority of seats in parliament depending on final election results. The markets would view a coalition between Five Star and the far-right League as the worst possible outcome of the election since both parties are euroskeptics. However, such a coalition is thought to be very unlikely due to the left-right divide in political views combined with the fact that Five Star has said it would refuse to join up with any partners in a coalition government.
The markets were also somewhat alarmed that the League (17.4%) won more votes than Berlusconi’s Forza Italia (14.0%), meaning that League leader Matteo Salvini will likely end up having the first shot at forming a coalition government and would likely be the new prime minister if he can forge a government.
The markets were not encouraged by Mr. Salvini’s comments in his news conference on Monday when he claimed to have the first right to form a coalition and thanked French nationalist leader Marine Le Pen for her support. He added, “The common currency system is bound to come to an end. Not because Salvini wants that but because that’s what facts, good sense and the real economy say. So, we want to be prepared when the moment comes.”
Yet the markets took Mr. Salvini’s euroskeptic comments with a grain of salt because he didn’t specifically call for an active effort to pull Italy out of the EU. Moreover, even if he becomes the new prime minister, he will be held in check to some degree by Berlusconi’s more establishment Forza Italia party.
Meanwhile, former Prime Minister Matteo Renzi on Monday resigned as the head of Democratic Party after the party’s poor showing. Mr. Renzi’s resignation was emblematic of the fact that the markets are not likely to see any of the reforms that Italy needs to become more economically competitive and reduce its debt load.
There is currently no obvious path forward to a governing coalition since no single group received a majority vote in Sunday’s election. The markets will continue to hope for a center-right/center-left grand coalition that saves the government. However, there are other less favorable permutations and also the possibility of new elections. The only thing that is certain is that the Italy’s government will now be in gridlock for a matter of weeks or months.
On the more positive side, Germany produced a working government just in the nick of time before the Italian election results started to emerge, which was supportive for the euro. EUR/USD on Monday closed the day slightly higher by +0.18%. Germany’s Social Democrats voted in favor of a grand coalition with Chancellor Merkel’s CDU bloc by a comfortable margin. That means that the markets at least have the comfort of knowing that Chancellor Merkel will continue to be the defacto leader of Europe.
rump tariffs may be headed for substantial dilution — Meanwhile, the U.S. on Monday continued to be consumed by President Trump’s announcement last Thursday of tariffs on steel and aluminum. Mr. Trump upped the ante over the weekend by threatening to slap tariffs on European auto exports if Europe retaliates for U.S. steel and aluminum tariffs.
Yet U.S. stocks were able to recover by mid-morning after the market dialed back concerns about a trade war since signs started to emerge that the steel and aluminum tariffs may end up being significantly watered down. Mr. Trump said that he may exempt Canada and Mexico from the metal tariffs if they give him the NAFTA deal he wants. In addition, the administration said that various U.S. industries will be able to apply for relief from the tariffs. The markets were also encouraged when hedge fund manager Ray Dalio made a widely-circulated comment that he believes that the Trump tariffs are “more for political show than for real threatening.”