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Turmoil In Italy, New China Trade Tariff Announcement Send Stocks Plummeting

May 29, 2018 - 5:41 pm

NEW YORK (WCBS 880/CBS News/AP) -- Worries overseas – particularly turmoil in Italy –sent stocks sinking Tuesday in the U.S. as well as Europe.

The troubles in Italy have resurrected fears of instability in the euro bloc, CBS News Business Analyst Jill Schlesinger told WCBS 880’s Steve Scott and Michael Wallace.

“Remember Brexit? Remember Grexit? Remember PIIGS – Portugal, Italy, Ireland, Greece, Spain – remember all those European worries? They’re back!” Schlesinger said, invoking Carol Anne’s ominous remark in “Poltergeist II.”

Investors sold stocks and prices for U.S. government bonds surged as investors shifted money into lower-risk investments. Bond yields dropped, and with them, interest rates on mortgages and other kinds of loans. Banks plunged as Wall Street expected they would earn thinner profits.

Major exporters like technology and industrial companies and big drug and medical device makers also skidded. Those companies depend on strong sales outside the U.S.

Investors dumped Italian government bonds, driving borrowing costs sharply higher for that country and rekindling fears of more financial strain for Europe's third-largest economy. They bought German and British government bonds instead, which are seen as more stable.

“There’s a lot of problems going on in Italy, and now, it looks like the political situation there is coming up to haunt markets – and bringing up the concept that perhaps there is going to be a problem with Italy remaining in the European common currency, so that’s what’s spooking the investment community today,” Schlesinger said.

The political upheaval in Italy is likely to lead to new elections in the next few months, and investors are interpreting the new vote as a referendum and that Italy could move closer to abandoning the currency if populist parties win the election. It's not clear if that would happen, but if it did, it would have major implications for the European financial system and its economy.

"Eurozone membership will be at the forefront of the next election," said Alicia Levine, the head of global investment strategy at BNY Mellon Investment Management. "Should Italy leave the eurozone, it's clearly bad for European assets and it's bad for the European banking system."

New jitters about the stability of the euro sent the currency's value against the dollar to its lowest level in almost a year. The dollar rose to 108.24 yen from 109.37 yen. The euro sank to $1.1531, its lowest since July, from $1.1669.

The S&P 500 index sank 31.47 points, or 1.2 percent, to 2,689.86. The Dow Jones industrial average turned negative for the year as it lost 391.64 points, or 1.6 percent, to 24,361.45. It was down as much as 505 earlier. In Europe, Italy's benchmark stock index plunged 2.7 percent.

Smaller U.S. companies, which tend to be more domestically focused than the large multinationals in the Dow, fared much better than the rest of the market. The Russell 2000 index fell far less than the Dow average, giving up 3.28 points, or 0.2 percent, to 1,623.65.

The Nasdaq composite fell 37.26 points, or 0.5 percent, to 7,396.59.

U.S. markets were closed Monday for the Memorial Day holiday.

Italian President Sergio Mattarella picked Carlo Cottarelli for prime minister after the anti-establishment 5-Star Movement and right-wing League refused to withdraw an anti-euro candidate as economy minister. That ended their attempt to establish a government after inconclusive elections in March. Cottarelli is likely to lose a vote of no confidence in parliament, which would mean another round of elections.

Investors dumped Italian stocks and bonds as a result. Yields on Italian government bonds soared as their prices declined. The yield on the 10-year Italian government bond jumped to 3.10 percent from 2.69 percent, a huge move. At the beginning of May the yield was just 1.78 percent. The sharp move higher reflects weakening confidence among investors in Italy's government.

The German DAX lost 1.5 percent and Britain's FTSE 100 and the French CAC 40 both sank 1.3 percent. Some of the worst losses went to European banks: Germany's Deutsche Bank dropped 6.2 percent to $11.30 and Banco Santander of Spain lost 9.1 percent to $5.31.

"Uncertainty and the unknowns themselves affect the real economy," said Levine, of Bank of New York Mellon. "You've going to have less investment, you're going to have a decline in consumer spending, you've going to have, on the margin, less consumer activity affecting growth."

Spain was facing political turbulence of its own on Tuesday. That country's parliament will hold a vote of no confidence in Prime Minister Mariano Rajoy after graft convictions of businesspeople and officials tied to his conservative Popular Party. The Spanish IBEX 35 sank 2.5 percent.

U.S. stocks were also affected Tuesday by an announcement by the Trump administration of new tariffs on Chinese tech goods amid trade disputes.

The U.S. announced that it will impose a 25 percent tariff on $50 billion worth of Chinese goods containing "industrially significant technology." The White House said in a statement on Tuesday that the tariff will cover goods related to the "Made in China 2025" program. The full list of imports that will be covered will be announced by June 15.

President Donald Trump has bemoaned the massive U.S. trade deficit with China — $337 billion last year — as evidence that Beijing has been complicit in abusive trading practices. The administration previously threatened China with $150 billion in tariffs before China agreed to "significantly increase" purchases of American goods and services in its effort to reduce the trade deficit earlier this month. A specific dollar amount was never announced. 

The White House wrote in its statement on Tuesday that the United States "will continue efforts to protect domestic technology and intellectual property, stop noneconomic transfers of industrially significant technology and intellectual property to China, and enhance access to the Chinese market." 

The White House also says the U.S. is planning new investment restrictions and export controls for "Chinese persons and entities related to the acquisition of industrially significant technology" as well as "pursue litigation at the World Trade Organization for violations of the Agreement on Trade-Related Aspects of Intellectual Property Rights based on China's discriminatory practices for licensing intellectual property.

According to a translated statement following the announcement, China's commerce ministry responded, "the strategic statement issued by the White House is both surprising and expected." 

The statement added. "This is obviously contrary to the consensus reached between the two sides in Washington not long ago. No matter what measures the United States takes, China has confidence, ability, and experience to safeguard the interests of the Chinese people and the country's core interests. China urges the United States to act in accordance with the spirit of the joint statement."

U.S.-China Business Council President John Frisbie also responded to the tariff announcement, saying "We would like to see both sides put the threat of sanctions on hold and quickly get into negotiations to resolve these important issues."

Frisbie added, "We need solutions that will put the trade relationship on a sounder path for mutual prosperity, not sanctions that will do more harm than good. We encourage both sides to use the coming weeks to achieve that goal."

The announcement comes as the administration negotiates with China on a broad trade dispute. Commerce Secretary Wilbur Ross is expected to travel to China later in the week for more talks. In its announcement on Tuesday, the White House continued to push for trade barriers to come down which they claim "make it both difficult and unfair to do business there."

The statement added, "The United States will request that tariffs and taxes between the two countries be reciprocal in nature and value.  Discussions with China will continue on these topics, and the United States looks forward to resolving long-standing structural issues and expanding our exports by eliminating China's severe import restrictions."

Schlesinger said many people were shocked by the new China tariff announcement, though there is no reason why it should be a shock. But many thought the volatility with China was over for now.

“I think that there were many whispers among Wall Streeters from the administration, which essentially went something like: ‘Hey listen. We’re not letting this thing blow up. We need the Chinese for the North Korea deal. Don’t worry.’ So everyone got a little bit complacent. Now it’s back in the news,” she said. “So, you know, both of these things unnerving investors.”

But Schlesinger said there is no need for investors to panic.

“We are coming to the end of the month. It has been a good month,” she said. “It wouldn’t surprise me if we saw a little more selling, but gosh, you know, for normal investors, you’ve got to take a deep breath and just wipe away the devil that’s on your shoulder that’s spooking you, and just say: ‘Eh, I don’t need this money for a long time. Let me relax.’”

U.S. government bond prices on Tuesday jumped as investors moved money into lower-risk assets. The yield on the 10-year Treasury fell to 2.78 percent, its lowest since early April, from 2.93 percent. JPMorgan Chase dropped 4.3 percent to $105.93 and Bank of America fell 4 percent to $28.96.

U.S. crude oil fell 1.7 percent to $66.73 a barrel in New York. Oil prices have slumped in the last week following reports that OPEC countries and Russia could start pumping more oil soon. Brent crude, used to price international oils, rose 0.1 percent to $75.39 a barrel in London.

Wholesale gasoline gave up 1.7 percent to $2.14 a gallon. Heating oil shed 1.1 percent to $2.19 a gallon. Natural gas dropped 2.2 percent to $2.88 per 1,000 cubic feet.

Gold fell 0.4 percent to $1,299 an ounce. Silver lost 1 percent to $16.37 an ounce. Copper gave up 0.5 percent to $3.06 a pound.

In Asia, Japan's Nikkei 225 fell 0.6 percent while the South Korean Kospi lost 0.9 percent. Hong Kong's Hang Seng index plunged 1 percent.

(© 2018 WCBS 880. CBS News and The Associated Press contributed to this report.)