3-7-18 8:21 AM EST | Email Article
By Riva Gold and Gregor Stuart Hunter 
   -- U.S. stock futures drop 
   -- Government bonds gain 
   -- Canadian dollar, Mexican peso are under pressure 

Economic adviser Gary Cohn's resignation from the White House hit global equities, U.S. stock futures and the currencies of America's trade partners Wednesday, as many investors judged the news meant President Donald Trump was pushing forward with tariffs.

Futures pointed to a 0.9% opening fall for the S&P 500 and a 1.2% drop for the Dow Jones Industrial Average. Shares of heavy machinery maker Caterpillar fell 2.6% in premarket trading, leading Dow declines on the assumption that trade frictions could increase raw materials costs for industrial giants.

The Stoxx Europe 600 was down 0.4% midday as the auto and basic resources sectors--seen as some of the biggest losers from escalating trade friction including proposed U.S. tariffs on steel and aluminum--led the way lower.

Mr. Cohn had served as Mr. Trump's top economic adviser for 14 months and was seen as pro-business and pro-trade by market participants. He said late Tuesday he would resign, days after Mr. Trump surprised his senior staff by announcing tariffs that Mr. Cohn had opposed.

"There is an assumption there has been a disagreement somewhere and the hottest issue is tariffs," said Russ Mould, investment director at AJ Bell. Mr. Cohn's departure "suggests to me the president is determined to get his way on steel and aluminum duties," although there is a sense that many other senior Republicans also oppose the measures, he added.

In Europe, mining and metals companies, seen as particularly at risk from the tariffs, were also hit by a decline in commodity prices. Shares of Swiss commodity giant Glencore were off 2.8% and Australian miner Rio Tinto fell 1.8%.

The WSJ Dollar Index edged down 0.1%, but currencies of countries that trade heavily with the U.S. mostly fell further. The Canadian dollar recently was down 0.4% against the greenback, bringing its losses in 2018 to 2.8%, while the Mexican peso was down 0.8% Wednesday. Canada and Mexico are among the biggest exporters of steel to the U.S.

"I don't think this thing with steel is ultimately going to result in a trade war," said Said Haidar, chief executive at hedge-fund investment firm Haidar Capital Management.

"The real question is, is there a read on from this to Nafta, does [Mr. Trump] go after Chinese intellectual property...does he go down this road further and further and do you start getting retaliatory effects?" he said.

Mr. Cohn's resignation is bad news for markets, said Robert Gillam, chief executive at McKinley Capital. "Gary Cohn is well-regarded in the investment community and we are likely to see some short-term negative sentiment" from his departure, he noted.

U.S. bank stocks were one area of immediate concern.

Shares of the biggest U.S. banks were set to open lower Wednesday as markets fretted over Mr. Cohn's departure, its implications for trade, the economy and regulation. Stocks in banks such as JPMorgan Chase & Co. and Bank of America Corp., the two biggest in the U.S. by assets and market value, were expected to open down more than 1%.

"This is, at least temporarily, a negative for investors, who saw the former Goldman Sachs exec as a market-and-bank-friendly influence on President Trump," Capital Alpha Partners analyst Ian Katz wrote in a note late Tuesday.

A big worry for investors and holders of bank stocks is that they have lost a White House proponent of globalism and free trade.

"The very deep concern is that he was a strong voice for policies that would benefit the economy and his loss is going to be seen as a potentially great negative," said a person who advises major U.S. banks.

Mr. Cohn was known as someone who would have "coherent policies and sound judgment and he would do what is right, not what is politically advantageous," this person added.

Bank-stock investors also viewed Mr. Cohn as an important White House voice pushing for deregulation of banks. On this front, though, the impact of his departure is likely to be more muted.

Although Mr. Cohn was consulted about key regulatory appointments, he wasn't the point-person within the administration for financial-regulatory matters, the person who advises banks said. And even though he is leaving, Trump appointees remain in key posts at the Federal Reserve and other regulators.

In Asian trading, Japan's Nikkei Stock Average ended the session down 0.8% with the yen climbing and commodities-related stocks, banks and auto makers sagging.

Shares of Kobe Steel, which supplies the makers of cars, planes and nuclear plants, fell 7.4% and shares of Showa Denko, which manufactures chemical products and industrial materials, were down 6%.

Hong Kong's Hang Seng and Australia's S&P/ASX 200 both fell 1%, weighed down by losses in the energy sector. Brent crude oil was last down 0.8% at $65.26 a barrel.

South Korea's Kospi fell 0.4% as optimism about North Korea being open to talking about giving up its nuclear weapons was offset by worries about global trade.

"I've gone from being a little bit relaxed about the trade-war thing to being quite a lot more nervous," said Kay Van-Petersen, global macro strategist at Saxo Bank.

Haven assets rose Wednesday on the uncertainty in U.S. policy, with the 10-year Treasury yield falling to 2.845% from 2.877% in late New York trading Tuesday. Yields move inversely to prices.

The yen, which tends to appreciate in times of market stress, was up 0.5% against the U.S. dollar and the Swiss franc rose 0.3%.

Still, many investors said they expect the market to recover, as long as an all-out trade war is avoided. The total quantity of steel and aluminum imports is small relative to the size of the U.S. economy, accounting for just 1.6% of imports or 0.2% of GDP, according to UBS.

"On the face of it, the [amount] of tariffs on steel looks steep, but as a proportion of trade, it's small," said Robert Tipp, chief investment strategist at PGIM Fixed Income.

The big question now is whether it will affect business sentiment, he said.

"In general, it should be a good period [for markets], but it's probably going to ping pong between these bouts of low volatility and great asset performance and short, sharp corrections that push people back on their heels when something crops up on the trade front" or elsewhere, he said.

Emily Glazer

contributed to this article.

Write to Riva Gold at riva.gold@wsj.com and Gregor Stuart Hunter at gregor.hunter@wsj.com


(END) Dow Jones Newswires

March 07, 2018 08:21 ET (13:21 GMT)

Copyright (c) 2018 Dow Jones & Company, Inc.
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