Trump's trade war escalation sends Chinese stocks tumbling to multi-year lows

It’s getting ugly in China. (Note: green on the price boards is bad – it means prices are falling). Photo by VCG via Getty Images

  • Chinese stocks have fallen heavily after US President Donald Trump ordered officials to identify a further $US200 billion worth of imports that could be subject to a 10% tariff
  • US stock futures also fell, and global benchmark bonds rallied in further signs of market unease.
  • China said it would “fight back firmly” against any initial tariffs.

Markets in China immediately fell into a sea of red at the market open on Tuesday in Asia, following a further escalation of trade tensions between Beijing and Washington.

A short time ago, the benchmark Shanghai Composite index had slumped by more than 3% which saw it fall below the 3,000 mark — the lowest level for China’s benchmark index since June 2016.

The index has now reopened after the lunch break and will trade until 5pm AEST.

Asian markets more broadly have tumbled, after US President Donald Trump said he authorised the Trade Department to identify another $US200 billion worth of Chinese goods that will become eligible for a 10% tariff, unless China relaxes its current stance.

At around midday Australian time, Chinese authorities responded to the Trump administration’s latest announcement.

Reuters reported that China’s Commerce Industry said if the US published a list of additional tariffs, “China will have to adopt comprehensive measures to fight back firmly”.

The Ministry also said that the latest threats by the US “disobeys negotiation and consensus reached previously between the two parties”, and the China will continue to protect its interests.

US stock futures have also fallen, with Nasdaq futures down 1% and the Dow and S&P500 futures markets each down around 0.8%.

And bond yields are in decline, with benchmark US 10-year bond yields edging lower to 2.88%.

Evan Lucas, chief market strategist at Investsmart Group, pointed back to last Friday’s tariff announcement by the US as the catalyst for renewed tensions.

“What happened on Friday was the game-changer. That event basically reversed previous efforts by US Trade Representatives to smooth out the negotiation process,” Lucas told Business Insider.

Lucas said China’s hand had now been forced and “it’s not only tit-for-tat announcements, it’s beginning to impact both markets.”

“Stocks in China are down sharply, and more importantly S&P futures are getting hit as well,” Lucas said. A short time ago, futures markets were pricing declines in US stocks of around 1%.

While the latest trade escalation was the catalyst for the latest price falls in China, stocks in Shanghai have been falling for most of this year as the Chinese government continues its crackdown on excessive leverage in the financial system.

China’s weakening market

Including today’s fall, the Shanghai Composite has now fallen more than 16% since its 2018 peak in late-January.

Elsewhere, the ChiNext index — which is China’s version of the tech-focused NASDAQ in the US — is set to post its 16th decline in the last 20 trading sessions.

A short time ago, the index had crashed by more than 4%, and was on track for its biggest one-day fall since March:

Ilya Spivak, senior strategist at IG Markets, noted that the trade tension had also sparked a move towards risk aversion.

“Most Asia Pacific shares are down alongside the Aussie and Kiwi Dollars while the anti-risk Yen is broadly higher,” Spivak told Business Insider.

In addition, stocks in Hong Kong have seen steep declines, with the Hang Seng index down by more than 2% in afternoon trade.

The losses in Asia currently stand in contrast to the Australian market, which rose by as much as 0.4% early in the session.

But a short time ago, gains had been trimmed and the index was trading flat on the day as poor sentiment in Asia weighed on the local index.

“The response from the ASX has been a bit more nuanced,” Spivak told BI.

“Shares soared Friday, led by a surge in the overweight financials sector as investors took stock of the US Fed and ECB rate decisions and concluded that an up-shift in global borrowing costs is good news for lenders’ margins.”

“Since then trade war jitters have punished Australian materials names but banks have remained an offset. After all, financials make up close a third of the index.”

However, “that is likely to change if trade wars persist. Materials names are also heavily represented at 19% of the ASX200. So if losses there really mount as the banks’ rally slows — a likely outcome as the Fed outcome is digested — a belated downturn is likely.”

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