Global stocks weaken with Trump expected to hit back at China

Geopolitical tensions dented global stocks on Friday as investors braced themselves for potential retaliation from Washington after Beijing approved a sweeping national security law for Hong Kong.

European stocks traded lower, with the FTSE 100 slipping 1.2 per cent and Germany’s trade-sensitive Dax falling 1.4 per cent.

In the Asia-Pacific region, Hong Kong’s Hang Seng index closed down 0.7 per cent, while Australia’s S&P/ASX 200 dropped 1.5 per cent and Japan’s Topix index shed 0.9 per cent.

Investor optimism over the easing of lockdowns prompted by the coronavirus pandemic is at risk of being overshadowed by simmering tensions between the world’s two biggest economies.

US President Donald Trump is scheduled to hold a news conference regarding China on Friday, after Beijing pushed ahead with legislation which has raised concerns about Hong Kong’s future as a financial centre.

“The agenda is unclear but given the recent mood . . . it is likely to be confrontational,” Deutsche Bank strategist Jim Reid said.

China on Friday threatened “countermeasures” against the US. When asked about possible measures, a spokesman for the ministry of foreign affairs referred to the US’s large trade surplus with Hong Kong.

“The important US financial institutions all have a presence in Hong Kong. The US has important interests in Hong Kong,” he said.

Overnight, Wall Street’s S&P 500 index reversed gains of 1 per cent to close down 0.2 per cent, snapping a three-day winning streak for US stocks.

Futures markets tipped towards further losses when US stocks start trading on Friday, with the S&P 500 expected to fall 0.5 per cent.

However, mainland China’s equity markets were less affected by geopolitical frictions on Friday, with the CSI 300 of Shanghai- and Shenzhen-listed stocks little changed.

The onshore exchange rate for the renminbi, which investors have been watching as US-China tensions rise, was little changed at Rmb7.14 per dollar. That was after the People’s Bank of China set the currency’s trading band stronger than analysts had expected.

“Recent [renminbi] fixings by the PBoC suggest an effort to dampen volatility — not drive the currency lower,” said Larry Brainard, chief emerging markets economist at TS Lombard. He added that the currency was set for “periodic bursts of volatility . . . but not of continuing steady depreciation”.

Oil prices dropped on the prospect of further escalation in US-China tensions. Brent crude, the international benchmark, was down 3.3 per cent to $34.10 a barrel. US marker West Texas Intermediate fell 3.8 per cent to $32.40.

Government bonds rallied. The yield on the US 10-year Treasury fell 0.038 percentage points to 0.667 per cent as investors moved into the debt.

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