Darkening tone on global trade hits global markets

Global stock markets fell, emerging market currencies weakened and haven assets were in demand on Thursday, after investors were rattled by the darkening rhetoric on trade ahead of this week’s top-level talks between the US and China.

The move away from risk set a range of assets on course for their worst weekly performance since the start of 2019, as doubts grew over the lofty valuations reached by one of the best starts to a year in decades.

China’s renminbi touched lows last seen at the start of the year. The currency, which is permitted to trade 2 per cent either side of a daily mid point set by China’s central bank, fell 0.3 per cent to Rmb6.8014 per dollar. It has weakened by 1.2 per cent since the start of last week.

Comments by US president Donald Trump at a Florida rally on Wednesday that China “broke the deal” during trade negotiations set the tone, upending expectations in the run-up to the talks that they would open the way for a breakthrough.

Instead, investors were faced with the prospect of higher US tariffs on imports from China, measures Beijing pledged to match.

The mood across markets was one of deepening concern rather than outright fear, with the biggest moves for mainland China’s stocks. The CSI 300 remained on course for its worst week since October.

“Markets are not pricing in a collapse in trade talks — that would mean a far bigger equity loss,” said Paul Donovan, global chief economist at UBS. “Instead, markets seem to assume a temporary tax increase with continued negotiations. Economically, the longer there is uncertainty the greater the economic damage.”

Wall Street futures reflected expectations that the S&P 500 stocks index will fall 0.8 per cent in opening New York trade, taking it further away from late April’s record closing high.

In Europe, sectors seen as most directly exposed to the potential impact of an intensified tariff battle led losses of about 1 per cent across national bourses. The Stoxx index tracking industrial metals makers fell 2.4 per cent, and the equivalent benchmark for carmakers fell almost 2 per cent.

The broader, Europe-wide Stoxx 600 fell 0.9 per cent, against a drop of almost 2 per cent, for the CSI 300, which tracks equities listed in Shenzhen and Shanghai.

Assets with exposure to China’s economy looked particularly exposed among Asia’s emerging markets.

South Korea’s won touched a two-year low against the dollar on Thursday, amid unease about the implications of the trade war for the country’s export-driven economy.

It fell 0.9 per cent to Won1,182.7 per dollar, a level last touched in January 2017.

Haven assets were in demand. Japan’s yen strengthened by as much as 0.5 per cent to a three-month peak at ¥109.58 per dollar. The yield on 10-year US government bonds fell to 2.4512 per cent, reflecting higher prices.

Liu He, China’s vice-premier and lead trade negotiator, is due to arrive in Washington on Thursday to meet Robert Lighthizer, the US trade representative, and Steven Mnuchin, the US Treasury secretary. 

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