Trade war worries affect emerging markets

Chinese stocks fell almost 4 per cent and alarm bells rang across global markets on Tuesday, as the trade dispute between the United States and China escalated further. 

The yuan also hit a five-month low overnight after US president Donald Trump’s threat to impose a 10 per cent tariff on another $200 billion of Chinese goods drew warnings from Beijing about $50 billion of retaliatory penalties on US goods.
Asian stocks wilted to a four-month low and Australia's dollar AUD=D4 and South Africa's rand ZAR= were among a diverse group of currencies caught in the crossfire.
Europe’s main equity benchmarks sank 1 to 1.5 per cent in early trading and Wall Street futures were pointing to similar falls there later, while safe-haven government bonds and the Japanese yen rallied as investors sought protection.
“You only have to look at how far the main Shanghai index has fallen to see that people would probably want some safe-haven assets at this point,” said DZ Bank analyst Andy Cossor.
China had warned it will take “qualitative” and “quantitative” measures if the US government publishes an additional list of tariffs on its products.
The trade frictions have unnerved financial markets, with investors and businesses increasingly worried that a full-blown trade battle could derail global growth.
“Trump appears to be employing a similar tactic he used with North Korea, by blustering first in order to gain an advantage in negotiations,” said Kota Hirayama, senior emerging markets economist at SMBC Nikko Securities in Tokyo.
“The problem is, such a tactic is unlikely to work with China.”
GREAT FALL OF CHINA
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.9 per cent to its lowest since early December. The losses had intensified through the day as the rout deepened in China.
The Shanghai Composite Index slumped nearly 5 per cent at one point to its lowest level since mid-2016, while Hong Kong's Hang Seng .HSI shed as much 3 per cent before ending 2.8 per cent down.
China’s economy is already clouded by a sharp slowdown in fixed asset investment growth due to the government’s deleveraging drive, a problematic property sector, a mounting debt burden and rising credit defaults
Economists at Nomura wrote, “The rising risk of a disruptive trade conflict makes a bad situation tentatively worse.”
Japan's Nikkei lost 1.8 per cent, South Korea's KOSPI retreated 1.3 per cent while Australian stocks bucked the trend and added 0.1 per cent, helped by a depreciating currency and an overnight bounce in commodity prices.
The dollar fell 0.75 per cent to 109.715 yen JPY= following Trump's tariff comments. The yen is often sought in times of market turmoil and political tensions.
It made ground on the euro in early European trading, however, to stand 0.3 per cent higher at $1.1556 EUR=.
China's yuan CNY=CFXS skidded to a five-month low. The Australian dollar AUD=D4, often seen as a proxy for China-related trades, brushed a one-year low of $0.7381.
EYES ON OPEC
With Russia and Saudi Arabia pushing for higher output, crude oil markets remained volatile ahead of Friday’s OPEC meeting.
Brent crude futures LCOc1 fell 0.8 per cent to $74.76 a barrel after rallying 2.5 per cent overnight, while U.S. light crude futures retreated 0.9 per cent to $65.27.
Lower-risk assets gained on the latest round of trade threats. Spot gold XAU= was up 0.35 per cent at $1,282.26 an ounce albeit after its sharpest drop in 1-1/2 years late last week.
The 10-year US Treasury note yield US10YT=RR touched 2.871 per cent, its lowest since June 1. Most European bond yields dropped too, with Germany’s 10-year government Bund, the benchmark for the region, at a two-week low of 0.363 per cent.
Italian government bonds, which are considered less safe and have suffered from recent domestic political ructions, sold off, with their 10-year yields IT10YT=RR up 3 bps at 2.59 per cent.
But the stress was highest in emerging markets, where the average yield on domestic currency debt was the highest since March 2017 and fast approaching 7 per cent.
“Escalation (of trade tensions) is a sort of impossible thing to forecast, but if it stops at this level you have probably created some nice risk premia in Asia and emerging markets,” said Hans Peterson, global head of asset allocation at SEB Investment Management.
“So if it doesn’t get worse it is probably a buying opportunity.”