Chinese equities suffered one of their worst days of the year on Monday, leading a decline in Asian markets that rippled into Europe as trade war fears dominated the start of the second half.
The CSI 300, a key index of big stocks listed in Shanghai and Shenzhen, closed down 2.9 per cent in its fifth-sharpest daily decline this year, according to Reuters data. Japanese and South Korea bourses both ended down more than 2 per cent, while the Europe-wide Stoxx 600 was almost 1 per cent weaker.
The potential economic damage a global trade war would cause has shot to the top of investors’ concerns over the past month. On Sunday, the Financial Times reported that the European Commission warned that President Donald Trump’s threat to impose tariffs on car imports with tariffs risked global retaliation against as much as $300bn of US products.
“Asia has much to lose given that the US is the region’s biggest export market and that emerging market Asian economies are the largest exporters globally,” analysts at TD Securities noted.
Although Asian markets endured the sharpest drops, European equities did not escape. France’s CAC 40 was 0.8 per cent lower in afternoon trading, Spain’s benchmark index, the Ibex 35, fell 0.7 per cent and Italy’s FTSE MIB dropped 0.9 per cent. Futures signal that the S&P 500 will fall 0.6 per cent when Wall Street opens. Meanwhile, oil was lower as Brent, the international benchmark, declined 1.2 per cent to less than $79 a barrel.
The warning from Brussels was the first time the EU had set out a detailed response to Mr Trump’s threat to add tariffs on imported vehicles.
Pressure on China’s bourses came alongside a further weakening in the renminbi, which in June had its worst month on record against the US dollar. By 4pm in Hong Kong the onshore version of the currency, which trades within a 2 per cent band, had slipped 0.6 per cent to Rmb6.6335 against the dollar.
Beneath the increasingly belligerent trade rhetoric between the US and China, there is also concern over signs that domestic demand in China is also slowing. A sharp drop in infrastructure spending is driving an overall decline in investment, which has led to weaker demand for outputs from China’s manufacturing sector.
That was reflected on Monday in China’s government bond market, where the yield on the 10-year government benchmark slipped 1.5 basis points to 3.47, its lowest level since May 2017.
“Adding to the anxiety over the trade dispute is concern at what China’s policy response will be. While an element of monetary easing is clearer for market participants to follow, a move toward managed currency weakness is a possibility, and one which could significantly complicate the picture,” said Koon Chow, strategist at UBP.
