A sharp escalation in the trade war between Washington and Beijing and mounting concerns over the global economic outlook have put US equities on track for their biggest one-day drop of the year, with declines exceeding 3 per cent, and prompted a further rally in bonds.
A global sell-off on Monday after China allowed its currency to weaken below a key threshold also resulted in hefty declines for Asian and European stocks.
Declines for US stocks accelerated around midday in New York after it was reported that Chinese companies had suspended purchases of agricultural products, and Donald Trump took to Twitter to accuse Beijing of currency manipulation. The S&P 500 and Dow Jones Industrial Average were each down 3.1 per cent in afternoon trade in New York, putting both gauges on track for their biggest one-day drops since December.
The S&P 500 is facing a sixth consecutive day of declines, which would be its longest losing streak in 10 months. The Nasdaq Composite was down 3.7 per cent.
The Cboe’s Vix, a measure of volatility nicknamed Wall Street’s “fear gauge”, jumped above 23 points for the first time since mid-May. Chinese state media reported that companies had suspended purchases of US agricultural products and that Beijing had not ruled out the possibility of imposing tariffs on US agricultural products purchased after August 3.
Mr Trump said in a series of tweets on Monday that China had “used currency manipulation to steal our businesses and factories, hurt our jobs, depress our workers’ wages and harm our farmers’ prices. Not anymore!” The headlines saw government bonds extend a recent rally that took place against a backdrop of confusion about the Federal Reserve’s outlook for interest rates and the Trump administration’s announcement last Thursday that new tariffs will be placed on $300bn of Chinese goods next month. US government debt climbed sharply in price, leaving the 10-year Treasury yield down 11.4 basis points at 1.741 per cent on Monday. It has fallen about 80 bps since the start of May as concerns over trade and signs of a slowdown in the global economy have built. The moves in the bond market, with longer-term borrowing costs dropping even further below short-term ones, resulted in the difference between the yields on 3-month and 10-year Treasuries falling to its most negative since April 2007. The inversion of this yield curve has preceded every US recession of the past 50 years.
“If the trade war escalates we may end up talking ourselves into a recession — that is the concern we’re seeing in the markets today,” said Anik Sen, global head of equities for PineBridge Investments. “There is very little visibility in any of this and that is the frustration because it keeps changing from day to day.”
The drop for stocks, which mirrored those across European and Asian stock bourses, came after last week’s 3.2 per cent fall in MSCI’s All-World stock index — the heaviest retreat since the market ructions of late 2018. Britain’s FTSE 100 was down 2.5 per cent, France’s CAC 40 shed 2.2 per cent and Germany’s Dax declined 1.8 per cent. MSCI’s broad index of Asian stocks outside Japan fell 2.9 per cent, with Japan’s Topix sliding 1.8 per cent. Traders priced in further stimulus measures from the Federal Reserve, with futures trade suggesting the central bank’s main rate will be 1.14 per cent at the end of 2020, 10 bps lower than expected on Friday.
That means market participants are now forecasting 100 bps of rate cuts by December next year, after the Fed last week cut rates by 25 bps in the first such reduction since the financial crisis. Across the Atlantic, the yield on Britain’s benchmark 10-year government bond struck a historic low, breaching a trough it hit in the wake of the 2016 Brexit referendum. It fell as much as 5.9bp to 0.49 per cent. In Germany, the 10-year Bund yield struck a new record low, falling as much as 4.7bp to minus 0.53 per cent.
The drop in China’s renminbi to under 7 per US dollar also cascaded into other major emerging market currencies. South Korea’s won was among the worst hit, sliding 1.4 per cent against the US dollar, while other actively traded currencies like South Africa’s rand were also under pressure. Robert Carnell, head of Asia-Pacific research at ING, said China allowing its currency to fall below Rmb7 was probably a “deliberate decision, and part of what we imagine will be a concerted series of steps aimed at pushing back at the latest US tariffs”. Echoing that sentiment, Chiara Silvestre, economist at UniCredit, said the fall in China’s currency was a “clear escalation of the trade war”.
It comes after Mr Trump last week unnerved investors by announcing plans to hit $300bn in Chinese goods with a 10 per cent tariff. The threat marked the latest escalation in a trade skirmish that has rattled investor sentiment globally and affected major exporters such as Germany. Mr Trump said on Monday that the move amounted to “currency manipulation”. “This is a major violation which will greatly weaken China over time,” he said.
In currency markets, Japan’s yen, which tends to rise during times of strife as domestic investors pull money back from global markets, strengthened 0.5 per cent against the dollar to ¥106.08. In commodities, gold rose 1.6 per cent to $1,463.97 an ounce as traders sought havens while global oil marker Brent crude was down 3 per cent at $60.04 a barrel.