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Stocks, metals feel the heat as new US-China trade war rattles markets

Reuters/London/New York 11 Jul 18 | 11:31 PM

Stocks fell and metals prices slumped to their lowest in a year on Wednesday, as US 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 US President Donald Trump’s already-threatened 10 per cent tariffs on an additional $200 billion of Chinese goods dampened hopes that Washington will eventually step back from the escalating row.

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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, the total amount of US imports from China last year.

Shanghai markets were hardest hit overnight, with stocks there down almost 2 per cent and the yuan weakening towards last week’s 11-month lows, down 0.4 per cent to 6.66 per dollar. Hong Kong's Hang Seng lost more than 1 per cent, 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.

“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 am 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 per cent 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 per cent to their lowest levels in about a year. Copper was down 3 per cent 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 as just like the 25 per cent levies on $34 billion of Chinese and US 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 have 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.

At 11.30 pm IST, the Dow Jones Industrial Average was down 141.78 points, or 0.57 per cent, at 24,777.88, while the S&P 500 was down 11.70 points, or 0.42 per cent, at 2,782.14. The Nasdaq Composite fell 22.36 points, or 0.29 per cent, to 7,736.84.

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 per cent to $1.1725 and the Australian dollar lost 0.6 percent to $0.7408. China’s yuan meanwhile dropped 0.45 per cent against the dollar to move back towards 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 per cent. 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 per cent 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 US 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 fell $2.51 to $76.30 a barrel by 11.30 pm, IST, while US crude was down $1.74 at $72.37 a barrel.

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