World stocks lower on US-China trade worries and political tension in Italy

London — World stocks drifted lower on Friday as the latest exchange of trade threats between the US and China dampened risk appetite, while Italian bonds and shares in the country’s banks sold off on signs of renewed government tensions in Rome.

The MSCI All-Country World Index, which tracks shares in 47 countries, was down by 0.1% after the start of European trading, and set to break a four-week streak of gains.

While a tech-led rally on Wall Street overnight filtered through to Asian stock markets, gains were capped by the trade tensions. MSCI’s broadest index of Asia-Pacific shares outside Japan was up 0.05%, though it was down more than 0.5% on the week.

The trade row between the world’s top two economies intensified mid-week after US President Donald Trump raised pressure on China by proposing a higher 25% US tariff on $200bn worth of Chinese imports. Beijing vowed to retaliate.

Investors were also cautious before the July US jobs report due later in the day. This will give a reading on the health of the world’s largest economy, now in its second longest expansion on record. Economists polled by Reuters expect that 190,000 jobs were created in July.

“The stock market trend continues to be characterised by a struggle between trade-war distress, growth risks and strong corporate second-quarter reports,” SEB strategists wrote in a note to clients. According to Bespoke Investment Group, mentions of tariffs in S&P 500 company earnings reports for the second quarter have more than doubled from the first quarter of this year.

Against a basket of currencies, the dollar hit its highest in more than three weeks, extending sharp gains made the previous day, while the euro fell to its lowest level since the end of June. Investors said the greenback was benefiting from safe-haven flows.

Italian two-year and five-year government bond yields rose about 22 to 25 basis points to 1.27% and 2.32% in early trade, hitting their highest levels since early June. Italian bank stocks fell 0.8% and are set for their worst week since early June. Economy minister Giovanni Tria is under pressure from within the government to raise spending and challenge EU budget rules.

The possibility that he might be forced to resign has investors worried that Italy could go on a spending binge, or even that fresh elections could follow. This, in turn, could strengthen the hand of the eurosceptic League party and its leader, Matteo Salvini.

The two-and five-year bonds have been most sensitive to concern about the chance of an Italian exit from the euro, which would increase default risk on debt coming due soon.

“Clearly, this is about the fear that Tria gets kicked out, which could lead to a collapse of the government, new elections, and the League gaining even further,” said Commerzbank strategist Christoph Rieger. “Or it may mean that they agree on a budget that’s at odds with the EU,” he added, saying this would imply heavier borrowing and greater bond supply.

Yields on 10-year bonds also rose, by nine basis points, to hit 3% for the first time since June 11, and the closely watched spread over Germany was at its widest since late June at 257 basis points.

With the trade tensions encouraging demand for safe haven assets, the 10-year US treasury note yield pulled back to 2.9767% from a 10-week high above 3%, brushed mid-week. The 10-year treasury yield had hit the peak partly due to a surge in Japanese government bond yields to one-and-a-half-year highs this week as the market tested the Bank of Japan’s (BOJ) rejigged policy framework, under which it now allows yields to fluctuate in a wider band.

Oil prices eased back slightly after the previous day’s rally, which was driven by an industry report suggesting US crude stockpiles would soon decline again after a surprise rise in the latest week. Brent crude futures were down 0.4% at $73.17 a barrel after surging 1.5% on Thursday.

Copper on the London Metal Exchange slipped 0.5% to $6,107 a tonne. With trade tensions hurting demand, the industrial metal was down 2.8% for the week.

Reuters