Opening Bell: Global Equity Selloff Continues, Bonds Stabilize

Key Events

The global equity selloff widened in Asian and European trade this morning. Heightened prospects of political instability in Italy spreading through the continent and US-China relations coming to a new deadlock reawakened investor fears that the first synchronized global growth in a decade may abruptly come to an end.

The Trump administration announced on Tuesday it was moving ahead with a 25 percent duty on $50 billion worth of Chinese imports—whose final list will be unveiled by June 15—and stepping up restrictions on China's access to sensitive US technology. Hours later, China’s Commerce Ministry said Beijing stood ready to fight back to protect the country's national interest, adding the latest move by the US was "unexpected" and at the same time "within expectations."

Europe’s STOXX 600 slid, but US futures are currently in the green: the S&P 500, NASDAQ 100 and Dow are all signaling that today's US session could be headed higher. It would be a confirming sign that the global equity dip-buying which picked up on Tuesday may be warding off a deeper selloff, at least for now. This comes on the heels of the earlier retreat of safe haven assets such as the yen, gold, and US Treasurys.

Steadying bonds are crucial for broader market stability, especially after Italy's sovereign bonds plunged on Tuesday, pushing the Southern European country's 10-year yield higher by 48 basis points, to 3.164 percent. While some market observers see the bond selloff as a knee-jerk reaction, in effect a buying dip, others are bracing for longer-term headwinds as the threat of the third-largest economy in the EU dropping out of the 28-nation bloc looms larger.

One high profile name warning cautioning markets about these major EU headwinds was billionaire business magnate George Soros, who in 2016 had been vocal about the UK leaving the European Union in the aftermath of the Brexit referendum. Regardless of whether the longer term disaster scenario Soros predicted will ultimately materialize or be averted, what already seems certain is that the European continent would take a strong initial hit from the increased risk of a domino effect, if another major economy leaves the single market or the single currency.

Global Financial Affairs

It's noteworthy that, on Tuesday, yields on 10-year Treasurys plunged the most since the UK's historic Brexit vote of June 2016. Yields fell for a fifth straight day for an aggregate 27 basis point slide—to close at 2.79 percent, the lowest level since April 12. However, the key indicator has rebounded to 2.85.

Meanwhile, the dollar is retreating the most since May 9, dragged down by falling yields—the driver that had, ironically, pushed the USD higher in the first place.

The euro is climbing back above the previous, November 7 trough but remains below the uptrend line since January 2017.

Earlier, during the Asian session, all major indices but Australia's S&P/ASX 200 slipped lower on a falling gap. The Australian benchmark, which fell just 0.45 percent, outperformed the region on a comparative basis. However, the slip wiped out all gains for the index this month.

The MSCI Asia Pacific Index headed to its lowest close since February, mostly weighed down by losses in financial shares, as mounting Italian risk reignited the specter of a wider European debt crisis and its potential ramifications beyond EU borders.

This followed the course of yesterday's US session, where US Financials tumbled 3.34 percent, crossing beneath its 200 DMA. Shares of Goldman Sachs (NYSE:GS), JPMorgan (NYSE:JPM), Citigroup (NYSE:C), Morgan Stanley (NYSE:MS) and Bank of America (NYSE:BAC) all lost more than 3 percent.

A 3.34 percent slump in Financials was also the main culprit of a 1.15 dive in the broader S&P 500. The Dow lost more than 500 basis points, but then eased to around 400 points, also weighed down by bank shares.

Japan’s TOPIX slumped 1.5 percent, losing ground for a third straight day, or seven sessions out of eight. Chinese shares on the Shanghai Composite fell for the sixth straight day to 1.8 percent, hitting its lowest close in more than a year, since May 22, 2017. The mainland index remains above the support of intraday lows, dating back to January 16, 2017.

At the same time, Hong Kong’s Hang Seng fell 1.55 percent, piercing through the lower boundary of a symmetrical triangle since the January stock correction. However, it then found support at those levels and rebounded. Nevertheless, the 30,000 psychological mark failed to provide a support, highlighting some weakness.

South Korea’s KOSPI suffered the heaviest losses among Asian benchmarks. It plunged 1.95 percent, hitting its lowest level since April 4. The index was pushed lower by two main catalysts:

1. The strengthening of the won, which benefited from revived hopes that nuclear talks between North Korea and the US may still take place on June 12, based on a diplomatic visit to the US by top North Korean official Kim Yong Chol, planned for Wednesday.
2. President Donald Trump’s proposed auto tariff. It endangers the $7 billion dollar rescue by the South Korean government of General Motors' (NYSE:GM) loss-plagued South Korea operation which, in return for the bailout, pledged to stay in the Asian country for a minimum of another decade, increase the purchasing of parts made in Korea and produce two new models with substantial demand in the US.

In other news, WTI consolidated for a second day, after Monday's long hammer, above an uptrend line since February 11. With OPEC and non-OPEC partners considering production increases as the price of oil tumbles, it might be difficult to fully understand what's really motivating oil market players now.

Up Ahead

• EU trade chief Cecilia Malmstrom and US Commerce Secretary Wilbur Ross are scheduled to meet on Wednesday in an informal World Trade Organization summit in Paris.

• The US jobs report for May—the last, pivotal employment reading before the Fed's next monetary policy meeting which takes place in June—comes out on Friday.

• Automakers report US sales for May on Friday.

• Also on Friday, 234 China large cap A shares will officially be included in MSCI's global indexes.

• On Saturday, US Secretary of Commerce Wilbur Ross will travel to Beijing for more talks with Vice Premier Liu He, covering trade and issues surrounding Chinese telecom group ZTE (HK:0763).

Market Moves

Stocks

• The STOXX Europe 600 fell 0.1 percent.

• Futures on the S&P 500 Index advanced 0.2 percent, the first advance in a week.

• The UK’s FTSE 100 fell 0.1 percent to the lowest level in more than three weeks.

• Germany’s DAX gained 0.1 percent.

• The MSCI Emerging Market Index dropped 1.1 percent to the lowest in almost six months on the largest dip in more than two weeks.

• The MSCI Asia Pacific Index sank 1.4 percent to the lowest level in almost 16 weeks on the biggest tumble in two months.

Currencies

• The Dollar Index slipped 0.35 percent to 94.52, the largest decrease in almost three weeks.

• The euro gained 0.3 percent to $1.1576, the biggest increase in almost three weeks.

• The British pound advanced 0.2 percent to $1.3274.

• The Japanese yen slid 0.1 percent to 108.84 per dollar.

• The Turkish lira climbed 0.6 percent to 4.5211 per dollar, the strongest level in more than a week.

Bonds

• The yield on 10-year Treasuries climbed seven basis points to 2.85 percent, the biggest increase in more than two weeks.

• Germany’s 10-year yield climbed seven basis points to 0.33 percent, the first advance in more than a week and the largest surge in almost six weeks.

• Britain’s 10-year yield gained six basis points to 1.197 percent, the biggest climb in almost two weeks.

• Italy’s 10-year yield sank 13 basis points to 3.032 percent, the largest tumble in 18 months.

Commodities

• WTI crude dropped 0.1 percent to $66.65 a barrel.

• Gold fell 0.2 percent to $1,296.70 an ounce, the weakest level in a week.

• Brent crude declined 0.1 percent to $75.28 a barrel, the lowest level in more than three weeks.