LONDON: European stocks posted their biggest drop of 2019 on Friday and bond yields tumbled to record lows after US President Donald Trump fired another trade war salvo at China, sparking a frenzied dash for safe-haven assets.
Trump said he would impose a 10 per cent tariff on $300 billion of Chinese imports from September 1, escalating a bruising and protracted clash between the world’s two biggest economies. China said on Friday it would take countermeasures.
The abrupt end to a truce in the trade conflict capped a critical week for global markets after the US Federal Reserve delivered a widely anticipated interest rate cut but played down expectations of many more ahead.
News that Trump will make an announcement about trade with the European Union at 1745 GMT on Friday did little to soothe frayed nerves.
Markets around the globe dived into a sea of red, with the pan-European Stoxx dropping 2 per cent in its sharpest daily tumble of 2019. The trade-sensitive DAX and France’s CAC 40 dropped 2.7 per cent, the former hitting a two-month lows.
“The market’s looking very, very nervous,” said Stephane Barbier de la Serre, adding that Trump’s move also ramped up the pressure on the Fed to deliver more rate cuts.
“Trump didn’t get the rate cut he wanted, so he’s going to force (the Fed) to do that. That’s frightful. And what will China do? What will the Fed do? It’s hijacking of monetary policy.” MSCI’s index of world stocks dropped 0.6 per cent as Asian bourses suffered heavy losses. Japan’s Nikkei fell 2.1 per cent, Hong Kong slumped 2.4 per cent and China mainland stocks declined around 1.5 per cent.
$1trValue that has been wiped off global stocks last week
The toxic cocktail of unmet expectations for central bank policy, trade war turmoil, Brexit woes and worries over the health of the corporate sector has wiped $1 trillion off world stocks this week.
US stock indexes fell at the open on Friday.
The Dow Jones Industrial Average fell 54.76 points, or 0.21 per cent, at the open to 26,528.66.
The S&P 500 opened lower by 9.66 points, or 0.33 per cent, at 2,943.90. The Nasdaq Composite dropped 54.70 points, or 0.67 per cent, to 8,056.42 at the opening bell.
Trump’s announcement, which came a day after US and Chinese negotiators concluded a meeting in Shanghai without much progress, marks an end to a trade truce struck in June and could further disrupt global supply chains.
The proposed levies triggered a stampede for safe-haven assets. Core Eurozone bond yields tumbled, with German 10-year government bond yields dropping to an all-time low of -0.502 per cent and the country’s entire government bond yield curve turning negative for the first time ever.
2%Drop in pan-European Stoxx index yesterday
That tracked the drop in 10-year US Treasuries yields to 1.832 per cent — the lowest since November 8, 2016, the day Trump was elected president.
Trump’s move may force the Fed to cut rates again to protect the US economy from trade-policy risks.
Although Fed Chairman Jerome Powell said Wednesday’s cut — its first in more than a decade — was a “mid-cycle adjustment” and not the start of an easing cycle, markets are not fully convinced.
The October Fed funds rate futures have jumped to fully price in a rate cut in September, compared with only around 60 per cent before the tariff announcement. Another 25 basis point move is priced in by December.
“In the grand scheme of things, it will become clearer and clearer that the Federal Reserve has started an easing cycle and will have no choice but to cut rates further,” said Akira Takei, fund manager at Asset Management One.
The new tariffs would hit a swathe of consumer goods from cell phones and laptop computers to toys and footwear, at a time when the manufacturing sector is already reeling from the accumulative impact of the trade war.
The US Institute for Supply Management said on Thursday its index of national factory activity fell to 51.2 last month, the lowest reading since August 2016.
In currency markets, safe haven bets took the limelight. The Japanese yen surged to 16-month high against the dollar, while the Swiss franc reached a two-year high of 1.0925 against the euro.
The dollar softened 0.2 per cent against a basket of currencies.
“How things progress for the US and the US dollar will depend now much more on whether there are signs that the trade conflict is increasingly leaving a mark on the US economy,” Commerzbank FX analyst Esther Reichelt said.
The euro recovered to $1.1096, from a two-year low of $1.1027 hit in US trade.
China’s offshore yuan weakened 0.2 per cent after in early trade touching 6.9769 per dollar — its lowest since November 2018.
The British pound held near a 30-month low versus the dollar as the governing Conservatives’ majority in parliament was reduced to one seat, adding to concern over politics three months before the country is due to leave the European Union. Sterling last stood at $1.2137.
In commodity markets, gold softened a touch to $1,440.15 per ounce after having risen 2.3 per cent on Thursday, staying near a six-year high of $1,453 touched two weeks ago.
Oil prices bounced back after suffering a sharp sell-off.
Brent crude rose 2.8 per cent to $62.19 per barrel, after having fallen 7.0 per cent on Thursday, its biggest daily percentage drop since February 2016. US West Texas Intermediate (WTI) crude rebounded 2.6 per cent to $55.34, having shed 7.9 per cent the previous day.