Global equities fell on Monday after their worst week of 2019, as hopes of an imminent US-China trade deal were crushed and neither side showed a willingness to budge, raising fears of a fresh round of tit-for-tat tariffs.
The United States and China appeared at a deadlock over trade negotiations on Sunday as Washington demanded promises of concrete changes to Chinese law and Beijing said it would not swallow any "bitter fruit" that harmed its interests.
"Looks like we are just slowly ebbing away. More tweets from Trump over the weekend stoking the fires for a trade war," said John Woolfitt at London-based Atlantic Markets.
The impasse left investors bracing for threatened retaliation by China for Washington's tariff increase on Friday on $200 billion worth of Chinese goods. The move followed accusations by US President Donald Trump that Beijing had reneged on earlier commitments. The pan-European Stoxx 600 slipped 0.7% while S&P 500 futures shed 1.3%.
Chinese shares tumbled, with the benchmark Shanghai Composite and the blue-chip CSI 300 shedding 1.2% and 1.8%, respectively, while Hong Kong's financial markets were closed for a holiday. Japan's Nikkei average sank as much as 1.0% to hit its lowest level since March 28, before closing down 0.7%.
"How far this escalates is what the market is really worried about as we haven't really got full details of what the US will do and how China will retaliate. The important thing is what's the impact on growth, and that's what the market is really fearing," said Justin Oneukwusi, portfolio manager at Legal & General Investment Management.
White House economic adviser Larry Kudlow told the "Fox News Sunday" program that China needed to agree to "very strong" enforcement provisions to secure a deal.
He said the sticking point was Beijing's reluctance to put into law changes that had been agreed. Kudlow said US tariffs would remain in place while negotiations continued and there was a strong possibility that Trump would meet Chinese President Xi Jinping at a G20 summit in Japan in late June.
"The risk of a full-blown trade war has materially increased, even though both sides seem to still want a trade deal and talks are expected to continue," UBS economist Tao Wang said.
Washington said it was preparing to raise tariffs on all remaining imports from China, worth approximately $300 billion. "Our base case is for limited progress and Chinese retaliation," said Michael Hanson, head of global macro strategy at TD Securities.
The offshore Chinese yuan fell to its lowest levels in more than four months at 6.90 to the dollar. Major currencies were relatively calm with the euro steady at $1.1230, while the dollar was little changed against a basket of currencies at 97.324.
The US Treasury bond yield curve between three-month and 10-year rates inverted on Monday for the second time in a week, with the 10-year yield now standing 0.0025% above the shorter-maturity bill. Viewed as a classic warning signal of a looming US recession, the curve inverted last Thursday for the first time since March,.
The US curve has inverted before each recession in the past 50 years. It offered a false signal just once in that time. "Overall in the short term the chances of recession have increased," Legal & General's Oneukwusi said. The trade war hit emerging market stocks, which were down 0.7 percent, hovering near January lows.
JPMorgan said it had reduced its emerging markets risk for the second time in as many months on Monday following the set-back in US-China trade talks.
In commodities, oil futures rose on increasing concerns about supply disruptions in the crucial producing region of the Middle East. Brent crude futures rose 0.5% to $71.00 a barrel and US West Texas Intermediate futures were up marginally at $61.73 per barrel.
In digital currencies, Bitcoin continued to move higher, holding onto gains over weekend. Bitcoin jumped more than 10% on Saturday and marked a nine-month high of $7,585.00 on Sunday.
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