The spectre of a global trade war sent world stocks tumbling towards a 2.5% weekly loss on Friday, and left bruised investors reaching for the traditional antidotes — government bonds, gold and the Japanese yen.
The falls came after U.S. President Donald Trump said the United States would impose tariffs of 25% on imported steel and 10% on aluminium, sparking concerns of retaliatory moves from major trade partners China, Europe and neighbouring Canada.
ArcelorMittal slumps
Europe’s STOXX 600 index fell over 1.5% led by a near 5% slump from world’s biggest steelmaker ArcelorMittal SA and 2.5-6% drops from the region’s carmakers worried that they might be next.
Wall Street futures were also pointing lower for what would be a fourth straight day and another difficult week for the benchmark S&P 500, Dow Jones Industrial and Nasdaq indexes.
“Trade wars are good, and easy to win,” Trump’s first Friday tweet said, which only acted to inflame the markets’ nerves.
The dollar and U.S. Treasury yields both fell as they appeared to push aside considerations of inflation, a major theme that spooked financial markets over the last month. Ten-year U.S. Treasuries yields dipped to 2.8024%, hitting its lowest level in three weeks and further extending the distance from its four-year peak of 2.957% touched on Feb 21.
The dollar fell across the board including to more than one year low against the yen at 105.54.
‘Will see retaliation’
“It is a real worry because Europe is a open global economy so it isn’t just about U.S. versus China,” said Ian Ormiston, a European equity fund manager at Old Mutual Global Investors about Trump’s moves. “And we will see retaliation there are no two ways about it.”
Europe’s market moves compounded what was already a fragile mood ahead of a crunch few days of politics.
Britain’s under-fire Prime Minister Theresa May will flesh out her Brexit plans later, while Germany will find out if it finally has a coalition government on Sunday with Italy also holding delicately-poised elections that day.
Combined with the simmering trade war nerves it was unsurprising then that safe-haven demand was on the rise. German Bunds — Europe’s credit market benchmark — saw their yields fall to a five-week low of 0.618% as Italy’s BTP yields dropped to a two-week low of 2.008%.
“I am surprised how little risk the market is pricing from this,” said the Chief Investment Officer of Pictet Wealth Management Cesar Perez Ruiz, referring to the Italian elections.
Steel buckles
The trade nerves had dominated Asian market moves.
Japan’s Nikkei tumbled 2.5% to end the week down 3.3%, while MSCI’s broadest index of Asia-Pacific shares excluding Japan dropped 0.9% to take its losses for the week to 2.1%.
Steelmakers were hit the hardest there too with South Korea’s Posco down 3.3% and Japan’s Nippon Steel off 3.8%. Toyota Motor shares skidded 2.4% too after the automaker had said the planned tariffs would substantially raise the production costs and therefore prices of cars and trucks sold in America.
‘How recessions start’
The anxiety over tit-for-tat trade tariff moves was underscored by Canada’s quick response, with officials in Ottawa saying they will retaliate. China and the EU both followed, saying that they will safeguard their interests.
In the currency market, the dollar’s retreat saw the euro jump back to $1.2273.
“The world stands on the brink of a trade war,” said Robert Carnell, head of research, Asia-Pacific at ING. “Forget the yield curve — this is how recessions start.”
