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Stocks Drop as Trade Battle Intensifies

Posted by hkarner - 6. August 2019

Date: 05-08-2019
Source: The Wall Street Journal

Chinese yuan depreciates to new low, following escalation in U.S.-China trade dispute

U.S. futures and global stocks started the week with sharp declines and the yuan depreciated to a new low as President Trump’s threat to impose more tariffs on Chinese goods continued to rattle investors.

The Stoxx Europe 600 was down 1.9%, led by losses in the basic resources sector, which dropped more than 3%.

“Trump escalating the rhetoric and tariffs puts pressure back on the Fed to do another rate cut,” said Christopher Peel, chief investment officer at Tavistock Wealth.

In the U.S., S&P 500 futures were down 1.5%. Futures don’t necessarily predict moves after the opening bell.

Government-bond yields continued to plumb new depths Monday on concerns about the global economy being hit by the U.S.-China trade conflict.

The German 10-year bund yield reached a record low at minus 0.573%, and was recently at minus 0.552%. The U.K 10-year gilt hit an intraday record low yield of 0.492%, but has since recovered slightly to 0.506%.

U.S. 10-year Treasurys yields fell to 1.783%, from 1.864% Friday. Bond yields and prices move in opposite directions.

Stocks across Asia fell and the Chinese yuan depreciated to a new low in offshore trading, following the escalation in the U.S.-China trade dispute and amid widespread protests in Hong Kong.

Japan’s Nikkei fell 1.7% and Korea’s Kospi dropped 2.6%, while the yuan weakened beyond the psychologically important 7-per-dollar level, falling as much as 1.9% to 7.1087 per dollar in Hong Kong in early trading.

China’s central bank said Monday the yuan’s decline was a result of trade protectionism and higher tariffs on Chinese goods. The People’s Bank of China said the yuan remains stable and strong against a trade-weighted basket of currencies and that the bank has the ability to keep it at a “reasonable equilibrium.” It also said it would crack down on short-term speculation in the yuan.

Hong Kong’s Hang Seng Index fell nearly 3%, as a citywide strike disrupted the airport and subway services. It followed a ninth weekend of protests against a controversial extradition bill and China’s growing influence on the city. In a speech Monday, Hong Kong’s leader Carrie Lam said society has become dangerous and unstable. The city’s stock market has fallen 9% in the past few weeks as the protests dent business sentiment and weigh on economic growth.

The declines in Asian stock markets came after U.S. stocks capped their worst week in months following Mr. Trump’s threats to extend tariffs to essentially all Chinese imports. That came shortly after the Federal Reserve lowered interest rates for the first time since 2008. Investors interpreted the rate cut as a pre-emptive move to counter slowing global growth and the worsening trade spat.

The U.S. dollar slipped, with the WSJ Dollar Index, which measures the dollar against a basket of currencies, down 0.1%.

While escalating trade tensions have lifted the dollar against currencies most exposed to trade with China, such as Australia, it has weakened slightly against most G-10 currencies, as market expectations of a Fed rate cut have increased, said Derek Halpenny, EMEA head of global markets at MUFG Bank.

The British pound, meanwhile, was down 0.6% against the euro to €1.0870. This was because of U.K. news reports suggesting an “increased chance of an election that spans the 31 October Brexit deadline,” Mr. Halpenny said.

Investors were awaiting U.S. nonmanufacturing index data for July, which will give an indication of activity in the services sector. Economists surveyed by The Wall Street Journal expect that the index increased slightly to 55.7 in July.

In commodities, U.S. oil prices fell, with West Texas Intermediate crude down 1.3% to $54.96 a barrel. Gold gained 1%.

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