Trump’s China Tariff Threat Roils Markets Around the World


Trump’s China Tariff Threat Roils Markets Around the World

U.S. Treasury yields down

U.S. stock futures slipped and global indexes moved sharply lower Friday after President Trump threatened to extend tariffs to essentially all Chinese imports.

The Stoxx Europe 600 fell about 2%, its biggest drop since December 2018.

“The problem with Europe is that it is more exposed to Chinese growth than the U.S.,” said Thomas Costerg, senior economist at Pictet Wealth Management.

Countries with direct exposure to the Chinese supply chain may suffer, said Georgina Taylor, fund manager at Invesco, warning that Germany and France may feel a hit.

Most regional Asian stock markets declined. Benchmarks in Japan and Hong Kong retreated more than 2%. In mainland China, the Shanghai Composite dropped 1.4%. Equities in Australia also weakened.

The drops came after U.S. indexes reversed earlier gains and finished Thursday down about 1%, in one of Wall Street’s most volatile days in months.

Futures for the S&P 500 and Dow Jones Industrial Average on Friday were down 0.3% and 0.2%, respectively.

The tariff move, if imposed, would mark another escalation in the U.S.-China trade conflict and could prompt retaliation from Beijing. The new tariffs would take effect Sept. 1 and cover $300 billion in Chinese goods—including smartphones, clothes, toys and other consumer products. They would come on top of tariffs already imposed on $250 billion in imports from China.

The yuan declined after President Trump threatened tariffs covering $300 billion in Chinese goods.


Photo:

/Associated Press

“The market’s worst fears have come to pass in that the fragile trade truce did not last long, just over a month,” said Charlie Lay, a foreign-exchange strategist at Commerzbank, referring to the cease-fire that the U.S. and China reached at the Group of 20 summit in Japan in June.

President Trump’s announcement comes after the Federal Reserve cut interest rates this week for the first time since the financial crisis. The cut was viewed as a pre-emptive move against worsening global growth in part related to the U.S.-China trade dispute.

It would be very hard for China to “sit back and do nothing,” said Ms. Taylor, adding that the tariffs were probably a surprise as the country had appeared to be “thinking more strategically and more long term.”

Investors sought haven assets such as U.S. Treasurys and the Japanese yen. The benchmark 10-year Treasury yield slumped below 2%, falling to its lowest level since the 2016 U.S. election.

“This latest trade salvo by President Trump just after the Fed cut certainly took the market by surprise,” said Eli Lee, head of investment strategy at Bank of Singapore. He said the new tariffs could do more harm than previous rounds of levies and said he was particularly concerned about the consumer sector.

Investors awaited the U.S. jobs report for July on Friday. Economists surveyed by The Wall Street Journal anticipate that 166,000 jobs were added to payrolls and that the unemployment rate fell to 3.6%.

U.S. international trade data are also set to be released, which will give an indication of the health of the American trade balance.

In the foreign-exchange markets, the Japanese yen gained 0.4% against the U.S. dollar after rising 1.3% overnight, its biggest single-day gain in more than two years.

The Chinese yuan hit 6.9769 a dollar in the offshore market, its weakest since November.

A weaker yuan makes it cheaper for U.S. buyers to purchase Chinese goods, helping offset the impact of higher tariffs. But China also doesn’t want a weaker currency to prompt an exodus of capital, which could prompt further currency depreciation.

Mr. Lee at Bank of Singapore said the risk of the yuan breaching the psychologically important 7.0 level against the greenback has increased.

However, he added: “It is still not clear if the Chinese will be willing to go down the path of letting 7.0 go rapidly, which will add significantly to trade tensions.”

Exporters and other trade-sensitive stocks led the decline in Asia. Japan’s Sony and Panasonic retreated more than 3%. BHP, the world’s largest listed miner, fell more than 3%.

Frank Benzimra, head of Asia equity strategy at Société Générale, said investors should cut exposure to Asia and global equities because the new levies could worsen economic conditions and earnings growth in Asia, where many countries rely on trade with China.

In commodities, global oil benchmark Brent crude was up 2% to $61.70 a barrel, as it partially recovered from a sharp fall Thursday following Mr. Trump’s tariff threat. Gold gained 1.1%.

Write to Steven Russolillo at steven.russolillo@wsj.com and Lauren Almeida at lauren.almeida@wsj.com

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