Markets

World stocks tumble as US-China trade war fears intensify

Anxiety sharpens as Trump seeks €200bn more in tariffs

Pedestrians walk past a stocks display board after the Hang Seng Index closed at 29468.15, a loss of 2.78 pe rcent, in Hong Kong on fears of a trade war between China and the US.

Tue Jun 19 2018 - 12:23

Asian stock markets tumbled and Europe opened lower on Tuesday after US president Donald Trump threatened China with a further $200 billion (€173 billion) in tariffs, increasing fears that a long-simmering spat between the two countries risks turning into a damaging trade war.

The Shanghai Composite closed down 4 per cent, putting it below the 3,000-point mark for the first time in more than 20 months, while the Shenzhen Composite slumped almost 6 per cent.

Concern

Investor anxiety sharpened after Mr Trump late on Monday asked officials to find a further $200 billion in Chinese goods that could be subject to tariffs unless Beijing dropped its vow to retaliate against an earlier set of US measures.

“We are starting to see signs of deepening market concern now that we can effectively confirm that a bilateral trade war is under way between the US and China,” said Sean Callow, a strategist at Westpac.

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The latest exchange between two of the world's most important economies was enough to send European equities lower at Tuesday's open, with Germany's Dax down 1.7 per cent. Large exporters were prominent among the biggest fallers, with steelmaker ThyssenKrupp down almost 3 per cent and sports brand Adidas weaker by 1.5 per cent.

The Europe-wide Stoxx 600 was 0.8 per cent weaker, while the Stoxx index tracking carmakers fell 1.6 per cent and the equivalent benchmark for the industrial metals sector dropped 2.4 per cent.

Futures trade also opened lower on Wall Street, with S&P 500 futures 1.2 per cent down.

In Hong Kong the benchmark Hang Seng was down 3.2 per cent while the Hang Seng China Enterprises index focused on large Chinese companies slid 3.9 per cent.

Critical

“The US open is going to be critical to see if Trump’s words and China’s responses can start to really shake the cosy consensus in the US market that everything is absolutely fine and new highs are a God-given right,” said Chris Bailey, European strategist at Raymond James.

The losses came after Mr Trump said in a statement on Monday evening in the US that he had directed the US trade representative to identify $200 billion of Chinese goods for additional tariffs at a rate of 10 per cent. That came after China responded at the weekend in equal measure to US plans, announced last week, for tariffs on $50 billion of Chinese goods.

But Beijing showed no sign of backing down, with China’s commerce ministry saying: “If the US suffers a loss of rationality and issues a [ tariff ] list, China will have to adopt strong countermeasures, which will be comprehensive measures combining quantity and quality.”

Most other Asia equities benchmarks were down markedly as well with Tokyo’s Topix closing 1.6 per cent lower and the Kospi off 1.5 per cent in Seoul. Only the S&P/ASX 200 closed basically flat after earlier gains.

“The fact the sell-off is relatively widespread across Asian assets reflects investors’ recognition that global supply chains mean tariffs on one product leaving a port in China for sale in the US likely involves the exports of several countries and components made by several companies,” said JPMorgan Asset Management strategist Hannah Anderson.

Negotiations

The $200 billion in additional tariffs come despite more than a year of negotiations and escalating threats between the world’s two biggest economies. The previously announced US tariffs were set to take effect in early July, as were those announced by China’s finance ministry.

On Monday, Deutsche Bank economists warned that while the first round of tariffs would have a negligible impact on China's economy, the damage would be much higher if the US initiated another round.

“The Chinese government so far has refrained from punishing US firms doing business in China. But if the trade war escalates, China may go beyond trade and look at the US firms’ business interests in China as candidates for retaliation,” they wrote in a report.

Expectations of tit-for-tat tariffs over the next several months will generate more volatility in global markets, cautioned Madhavi Bokil and Lillian Li, analysts at Moody’s.

“If trade policy uncertainty and financial market volatility also weaken consumer and corporate sentiment, the second-order impact of tariff increases would be to dampen currently robust global growth momentum,” they wrote in a report.

Copyright The Financial Times Limited 2018

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