Stocks Drop, Bonds Jump on New U.S. Tariff Threat

Stocks in Asia fell alongside U.S. equity futures and Treasuries jumped as the U.S. and China engaged in a new round of trade threats. Gold climbed and the yen surged.

The steepest slides were seen in Hong Kong and China – where the Shanghai Composite Index headed for a two year low – after President Donald Trump warned the U.S. will slap tariffs on more Chinese goods, prompting the Asian nation to swiftly retaliate. Japanese and South Korean shares also retreated, S&P 500 Index futures extended a slide and European futures signaled losses. The Australian dollar tumbled to its lowest in a year as commodity currencies weakened, while steel and iron ore plunged the most since March amid renewed concern over trade protectionism.

Markets ushered in a new wave of risk aversion as the war of words on trade between the world’s two-largest economies escalated just as the Federal Reserve this month signaled a faster pace of policy tightening and the European Central Bank said it will maintain its key rate until the second half of next year. China said it will hit back if the U.S. rolls out new tariffs, in response to Trump saying he has directed the U.S. Trade Representative to identify $200 billion worth of China goods for additional tariffs.

“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.”

Elsewhere, the pound steadied as U.K Prime Minister Theresa May faces a Commons vote Wednesday that could determine the outcome of Brexit talks. Oil retreated from Monday’s gains ahead of an OPEC meeting in Vienna this week. South Africa’s rand extended declines amid speculation Japanese retail investors were selling the currency against the yen as trade tensions mounted.

Here are some key events to watch for this week:

European Central Bank President Mario Draghi speaks at ECB’s Forum on Central Banking on Tuesday.

U.S. housing starts probably rose in May, data out Tuesday is expected to show.

Draghi, Reserve Bank of Australia Governor Philip Lowe, Bank of Japan Governor Haruhiko Kuroda, and Fed Chairman Jerome Powell join a panel on central bank policy in Sintra, Portugal, on Wednesday.

Thailand, Philippines and Brazil central bank decisions due Wednesday.

Bank of England rate decision on Thursday.

Also on Thursday: U.S. jobless claims, New Zealand GDP, South Korea export data.

The Organization of Petroleum Exporting Countries meets in Vienna on Friday.

And here are the main market moves:

Stocks

Japan’s Topix index fell 1.6 percent, its biggest drop in almost three months, at the 3 p.m. close in Tokyo.

Kospi index lost 1.5 percent.

Hang Seng Index dropped 2.6 percent.

Shanghai Composite Index slid 3.3 percent, on course for its lowest close since June 28, 2016.

Australia’s S&P/ASX 200 Index rose 0.1 percent.

Futures on the S&P 500 fell 1.2 percent.

FTSE 100 futures declined 0.8 percent as of 7:04 a.m. in London.

The MSCI Asia Pacific Index fell 1.3 percent.

The MSCI Emerging Markets Index lost 1.6 percent.

Currencies

The Bloomberg Dollar Spot Index pared a drop to be little changed.

The yen gained 0.9 percent to 109.56 per dollar.

The Aussie dollar declined 0.6 percent to 73.77 U.S. cents.

The euro fell 0.1 percent to $1.1613.

The pound traded at $1.3250, up less than 0.1 percent.

Bonds

The yield on 10-year Treasuries fell five basis point to 2.87 percent.

Australia’s 10-year bond yield decreased six basis points to 2.61 percent.

Commodities

Gold rose 0.3 percent to $1,282.25 an ounce.

West Texas Intermediate crude oil lost 0.9 percent to $65.26 a barrel after rising 1.2 percent on Monday.

Source: Bloomberg