US-China trade tensions hit global markets
Donald Trump’s wave of new tariffs against China triggered a steep sell-off in stocks and a rush of haven buying of government bonds on Friday as fears deepened about the threat posed by the trade dispute to global growth.
The worries led to the biggest two-day rally for US Treasuries since last May, pushing the benchmark 10-year yield down by 18 basis points over two sessions.
Germany’s 10-year Bund yield hit a new record low, moving more deeply into negative territory, meaning investors seeking safety were prepared to face a guaranteed loss when holding the debt to maturity.
Frankfurt’s Xetra Dax 30 — home to a range of major exporters — fell 1.9 per cent, with all but one of its constituents down. London’s FTSE 100 lost 1.4 per cent. The Europe-wide Stoxx 600 was down 1.7 per cent.
The darkening mood came after the US president disrupted a fragile truce between the world’s two biggest economies.
He announced a 10 per cent tariff on an additional $300bn of Chinese imports from September, escalating trade tensions. Mr Trump suggested high-level talks between the two sides in Shanghai this week had gone badly, dashing hopes, however faint, of a swift resolution to the dispute.
Mark Haefele, chief investment officer at UBS Global Wealth Management, said: “This re-escalation of tensions indicates that President Trump is prepared to escalate trade disputes even while campaigning for re-election.
“It will be important to monitor business sentiment surveys to see if there is a significant impact on the demand for workers — if businesses stop hiring, this would greatly increase the risk of a recession.”
Such a prospect would make further stimulus from central banks more likely, adding to the appeal of government bonds, which are often purchased as part of quantitative easing programmes designed to boost growth.
Aditya Bhave, global economist at Bank of America Merril Lynch, said the escalation of the trade war “could extend the global monetary easing cycle”, warning: “As a result, the dollar could remain strong despite Fed cuts. This could lead to more tariffs or currency intervention by the US.”
The dollar index slipped 0.2 per cent on Friday, leaving its year-to-date advance for 2019 at over 2 per cent.
On Friday, closely watched US jobs data were due before Wall Street’s opening bell, and were likely to take on more significance amid concern at the economic impact of the trade war. The non-farm payroll report for July was expected to show the creation of 164,000 jobs for the month.
After weak private sector jobs numbers and a lacklustre data from the manufacturing sector earlier this week, analysts were alert to the possibility of a disappointing set of data and potential further market volatility around it.
Andrew Hunter, senior US economist at Capital Economics, said: “We think it’s only a matter of time before the manufacturing malaise spreads to the wider economy . . . That lends some support to our forecast that overall non-farm payrolls rose by only around 145,000 last month.”
Wall Street’s S&P 500 was expected to extend Thursday’s loss of almost 1 per cent by a further 0.1 per cent, according to futures trading. It had been trading higher during the previous session before the impact of Mr Trump’s words.
Oil prices found support after a slide in the immediate aftermath of the escalation. Brent crude, the international marker, rose 2.2 per cent to $61.82 a barrel after falling as far as $60.50 on Thursday.
There were brisk losses across Asian stock indices, not least on China’s mainland, where the CSI 300 fell 1.9 per cent, with technology and consumer stocks among the hardest hit. On Hong Kong, the Hang Seng index fell 2.3 per cent.
China’s renminbi slid to its lowest level for the year, with the onshore variant weakening 0.6 per cent to Rmb6.9359 per dollar, taking it nearer the influential Rmb7 per dollar mark.
Tokyo’s Topix was sent 2.5 per cent lower. South Korea’s Kospi was knocked 0.7 per cent, sending it deeper into negative territory for the year to date.