By Samuel Indyk and Ankur Banerjee
LONDON (Reuters) – Global stocks dropped on Tuesday as concerns about tariffs and their impact on the economy lingered and as German conservative leader Friedrich Merz unexpectedly failed to secure the parliamentary votes required to become chancellor.
Markets were processing the surprise from the Bundestag where Merz failed to garner the votes required, dealing a major blow to his proposed government that has promised to revive economic growth at a time of global uncertainty.
“I didn’t expect what happened today to have happened at all,” said George Lagarias, chief economist at Forvis Mazars.
“Markets are going to be extremely negatively surprised if Merz fails to be elected as chancellor and Germany falls into disarray.”
Merz now has 14 days to try and win parliamentary support, and while this is not seen as a fatal setback, his failure to win parliamentary backing at the first time is a first for post-war Germany.
Germany’s DAX fell by as much as 2% but was last down about 1.3%. Britain’s FTSE 100 was down 0.3%.
Investor attention remains on the possibility of easing trade tensions between the U.S. and China after Beijing last week said it was evaluating an offer from Washington to hold talks over tariffs.
U.S. President Donald Trump said on Sunday that Washington is meeting with many countries, including China, and that his main priority with China is to secure a fair deal.
“We’ve seen a backpedalling and the trade risk has become lower,” said Lars Skovgaard, senior investment strategist at Danske Bank.
But with few details coming out about trade discussions, investors have been left trying to make sense of headlines coming out of the White House.
“Now we need to see some deals being announced otherwise the rise in stocks will fade again,” Skovgaard added.
Europe’s STOXX 600 was down 0.7% on Tuesday but remains close to its closing level on April 2, the day Trump announced his tariff proposals.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan, was down 0.1% with Japan closed for a holiday.
Chinese markets returned from an extended holiday with the blue-chip index and Hong Kong’s Hang Seng both up about 1%.
The Federal Reserve begins its two-day policy meeting on Tuesday, where the central bank is widely expected to keep rates steady but the spotlight will be on how policymakers are likely to navigate a tariff-ridden path.
“The Fed remains caught between a rock and a hard place,” said Christian Scherrmann, DWS chief U.S. economist. “We think they will opt for a slightly more hawkish tone, but more in the direction of an extended pause than a potential hike.”
Traders are pricing in 75 basis points of easing this year with the first move possible in July, LSEG data showed.
U.S. stock futures were falling on Tuesday, with S&P futures down 0.7%.
DOLLAR SLIPS, RISES VS ASIAN FX
Trump’s erratic trade policies have fuelled significant waves of dollar selling since April as investors shifted away from U.S. assets, pushing the euro, yen and Swiss franc higher.
The euro on Tuesday was little changed against the dollar at $1.1315, trimming an earlier rise after Germany’s parliamentary vote. The yen was up 0.3% at 143.24 per dollar.
The dollar selling has spread to other Asian FX, underscored by the Taiwan dollar’s record surge in recent sessions, which has stoked speculation that a revaluation of regional foreign exchange was possible to win U.S. trade concessions.
The Taiwan dollar was fairly sedate on Tuesday last fetching 30.28 per U.S. dollar, not far from the near three-year high of 29.59 it touched on Monday. [FRX/]
The focus has turned to Hong Kong, where the de facto central bank bought $7.8 billion to stop the local currency from strengthening and breaking its peg to the greenback.
“If these currencies keep strengthening sharply, it could spark fears of a ‘reverse Asian currency crisis’, with potential ripple effects in the bond market amid fears that Asian institutions reassess their unhedged exposure to Treasury holdings,” said Charu Chanana, chief investment strategist at Saxo.
The Hong Kong Monetary Authority said on Tuesday it has been diversifying currency exposure in its investment portfolio to manage risks.
On the mainland, China’s yuan strengthened to its highest level since November at 7.2105 per dollar. [CNY/]
In commodities, oil rose after hitting four-year lows in the previous session that was driven by an OPEC+ decision to accelerate output increases. Brent crude futures were last up 2.7% at $61.87 per barrel. [O/R]
Gold prices rose 1.4% to a two-week high of $3,386/oz on safe-haven demand. [GOL/]
(Editing by Kate Mayberry, Sharon Singleton and David Evans)
