World shares slipped for the fifth straight day yesterday and emerging markets weakened sharply, hit by the prospect of a global trade war and political instability in Europe after Italy’s inconclusive weekend election.
While most markets stabilised after sharp losses early in the day, assets considered low-risk – including gold, the yen and German bonds – remained in demand, with yields on the latter at the lowest in a month.
Recent events have again put equity markets, barely recovered from their February selloff, under a cloud.
The European Union, Canada and China are among those threatening to retaliate with tit-for-tat duties if US President Donald Trump proceeds with hefty tariffs on steel and aluminium imports.
Such a full-blown trade war could significantly damage company profits, equity returns and economic growth, all of which have benefited from the trade upswing of recent years. World shares have risen around 50 per cent since early-2016.
Jitters grew further after Sunday’s Italian election, where voters delivered a hung parliament, flocking to anti-immigrant and eurosceptic parties in record numbers, potentially endangering stability and wider European integration.
“There is nothing in the global set-up that’s positive for equities at the moment especially as (share) prices are still out of whack with latest developments,” said Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers.
Wall Street, where the Dow Jones index fell 3 per cent last week, was set to open weaker, futures indicated.
While Italian stocks remained 1 per cent lower at six-month lows, broader European markets reversed opening losses to rise 0.5 per cent.
That left MSCI’s all-country equity index marginally in the red, though emerging equities fell 0.7 per cent, near three-week lows.
Mr Ahmed said developments in Italy represented a “a medium-to-small shock” with implications for asset prices, while the risk of trade wars was a far bigger issue.
“Markets are not priced for trade wars and now you are also seeing a negative reaction to the US moves from Europe and Canada,” he said.
“The major vulnerability is in emerging markets,” he added, referring to the developing world’s reliance on trade.
The euro which earlier in the day fell 0.7 per cent to six-month lows versus the yen, erased some losses to stand 0.2 per cent lower in the afternoon while against the dollar too, it rose to trade flat.
The dollar, meanwhile, rose slightly off one-week lows against a basket of currencies and stayed a touch off November 2016 lows plumbed versus the yen immediately after Mr Trump’s trade threats last week.