Markets tumble on gloom over US-China trade talks

The market sell-off sparked by President Donald Trump’s vow to ramp up tariffs on China deepened on Wednesday, as Asian equities followed Wall Street lower with Chinese stocks touching their lowest level in two months.

The US benchmark S&P 500 tumbled as much as 2.4 per cent in New York on Tuesday before clawing back some of the losses in the last half-hour to end down 1.7 per cent. The European FTSE Eurofirst 300 index ended Tuesday 1.4 per cent lower, its biggest one-day drop since February.

Asian stocks, which managed a tepid recovery on Tuesday after Monday’s sell-off, were lower again on Wednesday. The CSI 300 index of Shanghai- and Shenzhen-listed equities shed as much as 2.1 per cent at the open, which took the benchmark to its lowest level since February, before paring losses to 0.3 per cent by late morning.

The sell-off extended across Asia, with Hong Kong’s Hang Seng dropping 0.7 per cent while Tokyo’s Topix was down 1.6 per cent, having initially touched a six-week low.

Coupled with an emerging markets sell-off, the MSCI World index of global stock markets fell 1.7 per cent on Tuesday, its second biggest decline of 2019. Investors sought out the relative safety of government bonds, sending prices higher and yields lower, while the yen — another safety-first trade — rallied against almost every currency in the world. The Japanese currency strengthened to a fresh five-week high on Wednesday of ¥110.14 to the dollar.

“A lot of the recovery in 2019 was predicated on the belief that policy would be far less uncertain than in 2018,” said Brian Levitt, senior investment strategist at OppenheimerFunds. “Investors should expect to see volatility return with the return of policy uncertainty.”

The sell-off started on Monday after Mr Trump’s weekend tweets promising to slap higher tariffs on more Chinese goods, and picked up pace on Tuesday after senior US officials disabused investors of the idea it was only a negotiating ploy by the president.

In a briefing on Monday, Robert Lighthizer, the US trade representative, and Steven Mnuchin, the US Treasury secretary, said levies on $200bn of Chinese goods would increase from 10 per cent to 25 per cent at 12.01am on Friday if a deal is not reached. They accused Chinese negotiators led by Liu He, vice-premier, of failing to honour commitments made in previous rounds of talks.

Despite the criticism, China’s commerce ministry said on Tuesday that Mr Liu would arrive in Washington on Thursday for an abbreviated round of talks. Mr Liu had previously been scheduled to lead a large delegation for at least three days of discussions aimed at concluding a draft agreement.

The sudden deterioration wrongfooted many investors, who have enjoyed a broad and powerful equity market rally in 2019 driven by signs that global growth was more robust than expected and by hopes of a trade deal, as well as by the Federal Reserve shelving plans to raise interest rates this year.

“The mere thought of additional tariffs is not constructive to the Chinese nor the US economy,” said Kevin Giddis, head of fixed income at Raymond James. “This would likely change the way economists look at the economic prospects of both countries.”

The Federal Reserve is resisting market pressure to signal a rate cut this year. Richard Clarida, the central bank’s vice-chair, insisted on Tuesday that “we don’t see a strong case to move rates in either direction”. He also echoed the view of Jay Powell, Fed chairman, that subdued inflation was partly due to “transitory” factors, suggesting there was no guarantee the next move would be to cut rates.

“A lot of hopes and prayers had been perched on the shoulders of the trade negotiators,” said Christopher Smart, head of the Barings Investment Institute. “The notion that it might all come tumbling down hadn’t even crossed anyone’s minds.”

With additional reporting by Siddarth Shrikanth in Hong Kong

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