ECB Hits Bonds; Biden Tariff Cut, Shimao Misses Payment - What's Moving Markets

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By Geoffrey Smith

Investing.com -- It's Independence Day in the U.S., and all domestic markets are closed, leaving the field open to Asia and Europe. Bonds are under pressure after a report saying that the ECB intends to end a hidden subsidy for the banking sector, while the leaders of Germany and Italy both hold crisis talks as they struggle to contain the economic fallout of the war with Russia. Russia completed the conquest of the last major city in the region of Luhansk at the weekend, bringing it a step closer realizing one of its most consistent war aims, control of the Donbas region. Elsewhere, base metals fell after Chinese real estate developer Shimao missed a payment on a $1 billion bond, and President Joe Biden may cut tariffs on Chinese imports this week. Here's what you need to know in financial markets on Monday, 4th July.

1. Eurozone bonds, bank stocks slump on ECB report

Eurozone bonds and bank stocks slumped after the Financial Times reported that the European Central Bank intends to end a long-running subsidy for the sector that has allowed banks to pad their profits simply by parking their excess liquidity at the central bank.

Yields on benchmark 10-year Eurozone government bonds rose by between 8 and 12 basis points, while bank stocks fell by as much as 3.8% on a morning when European stock markets were broadly higher.

Peripheral Eurozone assets came under the most selling pressure, reflecting the fact that countries such as Italy and Spain use the ECB’s facilities more proportionately than those in northern Europe. Italy’s markets came under particular pressure after a report saying that Prime Minister Mario Draghi would hold crisis talks with the Five Star Movement leader Giuseppe Conte later, in an effort to keep the party in a coalition that is fraying over the economic cost of supporting Ukraine.

2. Germany posts first trade deficit in 31 years

Those economic costs were in full view again as Germany posted its first monthly trade deficit in over 30 years in May, due to a 28% annual rise in its import bill. Exports also suffered as supply chain constraints and soaring energy prices constrained key manufacturing sectors such as autos and chemicals.

German Chancellor Olaf Scholz is also holding crisis talks over the state of the economy later Monday with representatives from trade unions and employers’ federations. The head of the trade union movement warned at the weekend that entire industries such as glassmaking and chemicals could be destroyed if the sharp rise in energy prices is sustained.

3. Biden eyes tariff cut this week - WSJ

U.S. President Joe Biden may announce the lifting of some Trump-era tariffs on Chinese imports as early as this week, The Wall Street Journal reported on Monday, citing people familiar with Biden’s thinking.

The tariffs, which have been criticized as “a drag” on the U.S. economy by Treasury Secretary Janet Yellen, are keeping prices for some imports higher than would otherwise be the case, and lifting them would take some of the heat out of goods price inflation. However, it would also expose Biden’s administration to charges of being weak on China, making the electoral benefits of any such measures doubtful.

Biden elsewhere found himself embroiled in a fresh row with Amazon (NASDAQ:AMZN) founder Jeff Bezos, who criticized his appeal to gasoline retailers to cut their prices. Bezos accused Biden of a “deep misunderstanding of basic market dynamics.”

4. Iron ore falls as Chinese real estate group Shimao misses bond payment

Chinese stocks advanced but industrial commodities came under pressure after real estate developer Shimao became the latest in the sector to miss a payment on its international debt.

The missed payment is an uncomfortable reminder that the country’s real estate debt problems remain far from solved and that the central bank has so far resisted the temptation to cut interest rates aggressively to allow the sector to try to borrow its way out of trouble, as it has in the past.

September iron ore futures on the Dalian Commodity Exchange fell as much as 6.3% to 716 yuan a ton, extending their losses to a third straight session, and touching their lowest in over a week, on the read across to demand for steel.

5. Oil drifts; Italy eyes extension to fuel tax holiday

Crude oil prices drifted in the absence of U.S. participants over the holiday weekend. Biden’s appeal to gas station operators wasn’t able to do much to U.S. retail gas prices which, at an average of over $4.80 a gallon, are still close to record highs.

By 6:35 AM ET, U.S. crude was down 0.3% at $108.07 a barrel, while Brent was down 0.2% at $111.40.

The market remains focused on the risk of recession and a sharp drop in demand toward the end of the year. However, governments are still trying to sustain demand where they can by cutting duties, Italy becoming the latest to eye an extension of its current gas tax holiday.