Trade Wars, Geopolitical risks and Inflation Dominate Market Moves

Ongoing political worries about Italy and Spain have triggered big moves in stocks, a drop in the EUR and a massive shift in bond yields in the last week in May. The contagion risks from a potential Italian implosion should concern market participants once again.

The eurozone’s third-largest economy is currently in the midst of an ongoing power struggle, with investors fearful that the looming prospect of “snap” elections could be fought over the country’s role in the E.U and its membership of the single currency. An election would resemble a referendum on E.U membership

Investors have reasons to be worried

The economic fundamentals of Italy are disturbing. It is one of the biggest indebted countries in the world. It’s got an unemployment rate of +11% and its economy is still lower than where it was in 2007, whereas most major economies have recovered.

2017 was a stellar year for economic growth in Europe; we’ve seen a resumption of inflation so those deflationary fears went away. Nevertheless, everybody is now concerned about potential for deflation and even potential for ‘contagion.’

Rain in Spain

Meanwhile in Madrid, parliament is set to vote Friday (June 1) whether to oust Spanish Prime Minister Rajoy and replace his center-right government with one led by the center-left Socialist Party after a Spanish court ruled that Mr. Rajoy’s Popular Party financially benefited from an illegal kickback scheme.

Off again, on again

A senior N. Korean official will be in New York this week to discuss the upcoming summit, proof that the latest indication that an ‘on-again-off-again’ meeting between Trump and Kim Jong-Un may go ahead on June 12 in Singapore.

Trade meetings

President Trump also announced this week that the U.S would proceed with tariffs on +$50B in Chinese imports and introduce new limits on Chinese investment in U.S high-tech industries as part of a broad campaign to crack down on Chinese acquisition of U.S technology. Specifics of the new limits are expected to be announced by June 30 and will take effect shortly thereafter.

Commerce Secretary Wilbur Ross is due to arrive in Beijing June 2 for talks aimed at cooling trade tensions between the two countries.

Regarding Nafta, Canadian Foreign Affairs Minister Chrystia Freeland heads back to Washington (May 29) for a two-day visit as talks to modernize the Tri-lateral agreement hang in the balance.

Time is of the essence for Canada as the latest reprieve from potentially crippling U.S tariffs on imports of steel and aluminum expires June 1, and there are fears they could go into effect without a Nafta deal in place.