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Escalating Tit-for-Tat Tariffs Affect Stocks, Treasuries

Tough trade talk is nothing new for investors in 2018, but a sense that stress between the US and China is ratcheting up is taking hold of markets
Shares of petrochemical companies in Asia slumped on Tuesday, tracking the global equity downturn overnight.Shares of petrochemical companies in Asia slumped on Tuesday, tracking the global equity downturn overnight.

The trade dispute between the world’s two largest economies showed signs of deepening and accelerating on Tuesday, triggering a global sell-off of riskier assets and flight toward havens. Stocks dropped, treasuries rallied, gold climbed with the yen and shares of petrochemical companies in Asia slumped.

The Stoxx Europe 600 retreated a third day and US equity futures slumped, tracking losses across Asia as Chinese shares plunged after reopening following a holiday. President Donald Trump warned the US will slap tariffs on more Chinese goods, and the Asian nation threatened retaliation. The lurch toward protectionism rattled commodities and commodity-linked currencies, which retreated across the board, Bloomberg reported.

Tough trade talk is nothing new for investors in 2018, but a sense that stress between the US and China is ratcheting up is taking hold of markets. The protectionist moves come at a time when many are already voicing concern over the momentum of global growth, which must also contend with America’s faster tightening of monetary policy and the end of European stimulus.

“Will it escalate from here? We’d certainly hope not, but it’s certainly a risk,” Craig Vardy, head of fixed income in Australia for BlackRock Inc., said in an interview in Sydney. “The numbers we think at the moment are pretty small. These are just warning shots going across the bows as some of these countries try and correct some of the trading numbers.”

All the same, emerging markets were in turmoil as the implications of a possible trade war filter through to investors. Developing-nation stocks plunged and currencies dropped, with the South African rand tumbling.

Meanwhile, oil fell with other commodities, paring Monday’s gain as traders weigh OPEC’s discussions on a compromise over increasing output ahead of a meeting in Vienna this week.

Asia Stocks

Asian stocks extended a global downturn on Tuesday, while the safe-haven yen rose. S&P 500 futures were off 0.6%, pointing to a another down day for Wall Street shares which slipped on Monday.

MSCI’s broadest index of Asia-Pacific shares outside Japan dipped 0.1%. Japan’s Nikkei lost 0.45%, South Korea’s KOSPI edged down 0.1% while Australian stocks added 0.3%.

Chinese markets led losses in Asia, with major markets in the region closing sharply lower. Greater China markets recorded heavy losses. On the mainland, the Shanghai composite fell 3.82% to close below the 3,000 mark at 2,906.43. The smaller Shenzhen composite sank 5.77% and closed at 1,594.05. Hong Kong's Hang Seng Index fell 3.08%.

In Europe

US stock index futures were lower during Asia afternoon trade, with Dow Jones industrial average futures down 374 points. S&P 500 e-mini futures were lower by 1.26%.

The escalating protectionist tit-for-tat between the US and China extended a selloff in European shares on Tuesday with autos, mining and technology stocks in the eye of the storm.

Europe’s main equity benchmarks sank 1 to 1.7%. The pan-European STOXX 600 fell 1.2% to its lowest since April 26, while eurozone stocks tumbled 1.4%, Reuters reported.

Germany's DAX, home to some of the world's biggest carmakers which Trump has explicitly targeted in his tariffs rhetoric, suffered the worst fall, down 1.7%. Autos stocks were the biggest drag, with Daimler, Volkswagen and BMW down 1.5 to 2.7%. The STOXX 600 autos sector hit its lowest in seven months as traders priced in higher tariffs.

Multinational sportswear company Adidas also fell 1.9%, as the fear of an end to unfettered access to global markets also bruised luxury stocks Kering, Hermes, LVMH and Moncler.

Industrial conglomerate Siemens was one of the biggest drags on the STOXX along with French planemaker Airbus.

Mining shares tumbled 2.1%, tracking a decline in London copper prices.

Highly valued tech stocks were also selling off as investors shed the sectors that have led the strong equity rally. The tech sector sank 2.2%, having hit a 17-year high as recently as Friday.

The US dollar fell 0.45% to 110.06 yen following Trump’s tariff comments. The yen is often sought in times of market turmoil and political tensions.

The euro was 0.05% higher at $1.163. The Australian dollar, often seen as a proxy to China-related trades, shed 0.25% to $0.740.

Overnight Reaction

Shares of petrochemical companies in Asia slumped on Tuesday, tracking the global equity downturn overnight, ICIS reported.

At 11:00 hours Singapore time (03:00 GMT), Hong Kong-listed Sinopec Shanghai Petrochemical was down by 1.81%, PetroChina fell by 2.65% and CNOOC Ltd was 2.63% lower. The key Hong Kong Hang Seng Index fell by 1.97% to 29,712.94.

In Japan, Mitsubishi Chemical was down by 1.80%, Asahi Kasei Corp slipped by 0.38% and Mitsui Chemicals was down 1.64% as the benchmark Nikkei 225 fell by 0.87% to 22,482.89.

In South Korea, LG Chem slumped 3.41%, while Lotte Chemical lost 3.38% as the Korea Stock Exchange KOSPI Index was down by 0.68% at 2,360.18.

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