Global stocks plunge after China hints it could unleash a 'powerful' trade war weapon

  • Global markets fell on Wednesday as traders feared further escalation in the US-China trade war.
  • State-aligned newspapers warned China is prepared to cut off supplies of rare-earth metals.
  • “We advise the US side not to underestimate the Chinese side’s ability to safeguard its development rights and interests,” one editorial read. “Don’t say we didn’t warn you!”
  • Investors’ flight to bonds pushed the 10-year US Treasury yield to a 19-month low.
  • View Markets Insider’s homepage for more stories.

World markets slumped on Wednesday as traders braced for further escalation in the US-China trade war. State-aligned Chinese newspapers warned the Asian nation is prepared to cut off America’s supply of rare-earth metals, spurring investors to ditch stocks for bonds.

“Will rare earths become a counter weapon for China to hit back against the pressure the United States has put on for no reason at all?” wrote the editorial board of the People’s Daily, according to Reuters. “The answer is no mystery.”

The newspaper noted America’s “uncomfortable” dependence on so-called rare earths, a group of 17 chemical elements used in a wide range of electronic devices including smartphones, car batteries, and missile-defence systems. The US relied on China for than 80% of its rare-earth imports between 2014 and 2017, and ramped up purchases by 17% to $US160 million last year, according to Bloomberg.

“We advise the US side not to underestimate the Chinese side’s ability to safeguard its development rights and interests,” the newspaper added. “Don’t say we didn’t warn you!”

The Global Times, its sister paper, also published an editorial describing an export ban on rare earths as a “powerful weapon” in the trade war, according to Reuters.

The commentaries follow a visit by Chinese President Xi Jinping and Liu He, China’s top trade negotiator, to a domestic rare-earths facility earlier this month, signalling their willingness to use the metals as leverage in trade talks with the US.

“China’s threat to include rare-earth exports on its list of weapons to fight back [against] Trump’s actions is a quite substantial move and, should it happen, it would take the dispute to another level,” said Konstantinos Anthis, head of research at ADSS. Withholding metals such as yttrium and lanthanum could “disrupt electronics and defence goods production in the States,” he added.

China’s saber-rattling comes after President Trump accused its officials of sabotaging a draft trade agreement, hiked tariffs to 25% on $US200 billion worth of Chinese goods, and began preparations to expand duties to virtually all Chinese imports to the US.

His administration also blacklisted Huawei, citing espionage concerns, before relaxing the ban to allow the Chinese telecoms giant to continue servicing existing equipment and devices. China retaliated by announcing tariffs on $US60 billion of US products starting in June.

The prospect of a fiercer trade war prompted investors to sell stocks and buy bonds, sending the yield on the 10-year US Treasury note to 2.268% – its lowest close since September 2017, according to the Wall Street Journal. It also fell further below the yield on three-month Treasurys. The inverted yield curve is a “flashing warning from the bond market,” said Jasper Lawler, head of research at London Capital Group.

“Bonds are rallying as a haven asset, dragging the yields lower as investors fret over stalled US – China trade talks,” he added. “Sentiment is taking a turn for the worse as trade tensions between the two powers show no signs of easing.”

Here’s the market roundup as of 11.15 a.m. (6.15 a.m. ET):

US stocks are set to open lower. Futures underlying the Dow and S&P 500 were down about 0.6%, while Nasdaq futures fell 0.8%.

European markets slid in morning trading. Germany’s DAX dropped 1.2%, Britain’s FTSE 100 slumped 1.3%, and the Euro Stoxx 50 fell 1.4%.

Asian markets were broadly down. While the Shanghai Composite climbed 0.2%, Japan’s Nikkei dropped 1.2%, the SZSE Component fell 0.3%, and Hong Kong’s Hang Seng slid 0.5%.

Oil prices have fallen sharply with Brent and WTI crude down around 2% to $US67.40 and $US57.90 a barrel.

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