Stocks drop and government bonds rally on growing trade angst
A fall in China’s currency below a key threshold ricocheted on Monday across global financial markets, sending stocks and emerging market currencies sinking and adding fuel to an intense rally in government bonds.
The drop across European and Asian stock bourses, from South Korea, to Japan, and Germany, 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.
Germany’s Dax, Britain’s FTSE 100 and France’s CAC 40 all opened down around 1 per cent. In Asia, Japan’s Topix slid 1.8 per cent and South Korea’s Kospi declined 2.6 per cent.
The CSI 300 gauge of mainland China stocks dropped 1.9 per cent, while Hong Kong’s Hang Seng fell by 2.8 per cent. S&P 500 futures tracking Wall Street’s main stock barometer fell more than 1 per cent.
Government bonds extended a recent rally amid swelling demand for perceived havens and expectations that major central banks such as the Federal Reserve and European Central Bank will be forced to unleash a round of stimulus measures.
US government debt climbed sharply in price, sending the 10-year Treasury yield sliding 10 basis points (0.1 percentage points) to 1.757 per cent, following last week’s sharp advance. In Germany, the 10-year Bund yield struck a record low, falling 0.4 bps 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, leaving MSCI’s EM FX index down 0.9 per cent in its worst day in more than two years. South Korea’s won was among the worst hit, sliding almost 1 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 US President Donald Trump last week unnerved investors by announcing plans to hit $300bn in Chinese goods with a 10 per cent tariff. The threat by Mr Trump marked the latest escalation in a trade skirmish that has rattled investor sentiment globally and affected major exporters such as Germany.
In currency markets, Japan’s yen, which tends to rise during times of strife as domestic investors pull money back from global markets, was recently up 0.7 per cent against the dollar to ¥106.
The level had been briefly breached earlier in the day, with the yen hitting a high of ¥105.80, last seen after the “flash crash” incident on January 3. Monday’s move was so severe it prompted an emergency meeting of the Bank of Japan, the finance ministry and the financial services industry.
Traders said that, if sustained over coming days, the yen’s rise to ¥105.90 could mark a major turning point for a currency that has traded in a range well below that for more than a year, and whose level has historically held a huge psychological importance to Japanese equity trading.
In commodities, gold rose more than 1 per cent as trade sought havens while global oil marker Brent crude was down 1.1 per cent.
Additional reporting by Leo Lewis in Tokyo and Edward White in Seoul