London: Stocks fell and metals prices slumped to their lowest in a year on Wednesday, as U.S. threats of tariffs on an additional $200 billion worth of Chinese goods pushed the world’s two biggest economies ever closer to a full-scale trade war.
The detailing overnight of U.S. President Donald Trump’s already-threatened 10 percent tariffs on an additional $200 billion of Chinese goods dampened hopes that Washington will eventually step back from the escalating row.
The clock now starts ticking on a two-month period of public comment before the levies get imposed. Trump has said he may ultimately target more than $500 billion worth of Chinese goods - roughly the total amount of U.S. imports from China last year.
Shanghai markets were hardest hit overnight – with stocks there down almost 2 percent [.SS] and the yuan weakening toward last week’s 11-month lows, down 0.4 percent to 6.66 per dollar.
Hong Kong’s Hang Seng lost more than 1 percent, as did Japan’s Nikkei as the yen received something of a safety bid.
Europe’s main bourses, also taken aback as Trump kicked off a NATO summit in Brussels by accusing Germany of being a “captive” of Russia, then saw similar falls. [.EU]
“There is still a good six or seven weeks before these (tariffs) take effect so it is not like we are going to see these tomorrow, but it is definitely the next step in a trade war,” TD Securities global strategist James Rossiter said.
“I’m curious to see what China does to retaliate in the coming days.”
The concerns were also evident in currency markets.
The Australian dollar, often seen as a proxy for Chinese economic fortunes, fell 0.6 percent as did South Korea’s won and Mexico’s peso which also faces the threat of Trump ditching the NAFTA trade pact.
It was industrial metals prices though that took the heaviest hit over worries that the dispute could ultimately dent China’s commodity-hungry economy.
Copper, zinc and lead all slumped between 3 and 4 percent to their lowest levels in about a year. [MET/L] Copper was down 3 percent at $6,141.50. Nickel, tin and aluminum also dropped to multi-month lows.
Trump’s latest move took the wind out of investors’ sails largely because the central scenario for many in the markets is that Washington will eventually step back from the escalating row and settle for some sort of compromise.
The more it turns up the heat therefore, the more likely the tariffs get implemented – just like the 25 percent levies on $34 billion of Chinese and U.S. imports triggered on Friday.
There is a two-month period of public comment on the latest proposed list before the tariffs get imposed.
“There certainly is going to be pronounced risks mainly because we’ve now moved on to the tit-for-tat-for-tit phase of it,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore.
“This is going to drag on until they can all come to the table and agree to even the playing field. But the unpredictability of the situation continues to rattle the markets,” said Varathan.
WALL STREET IN FOCUS
Washington had proposed the extra tariffs after efforts to negotiate a solution to the dispute failed to reach an agreement, senior administration officials said on Tuesday.
Wall Street’s S&P 500 had closed at its highest level in almost six months overnight but futures on the index and the Dow Jones were down 0.8-0.9 percent respectively, which pointed to a bumpy restart later.
The yen, often sought in times of political tensions and market turmoil, gained against a number of peers.
The dollar traded at 111.02 yen, pulling back from a near two-month peak of 111.355. The euro fell 0.2 percent to $1.1725 and the Australian dollar lost 0.6 percent to $0.7408.
China’s yuan meanwhile dropped 0.45 percent against the dollar to move back toward an 11-month low plumbed last week.
Demand for assets that traditionally ride out turbulence saw the 10-year Treasury note yield fall 3 basis points to 2.84 percent. That was a pullback from a one-week peak of 2.875 percent scaled the previous day.
Bond yields across most of Europe were 2 to 3 basis points lower too. Germany’s 10-year Bund yield fell 2 bps to 0.30 percent though UK gilts missed out as Brexit turmoil continue to batter the country’s ruling Conservative party.
Oil prices were also hit by the trade war concerns. The U.S. had said it would consider requests from some countries to be exempted from other sanctions that it plans put into effect in November that prevent Iran from exporting oil.
Brent crude futures lost 0.8 percent to $78.22 a barrel. Oil had risen the previous day, supported by a larger-than expected U.S. stock draw and supply concerns in Norway and Libya.