Global equity investors ran for cover yesterday as it dawned on markets that US President Donald Trump’s trade war threat against China could be deadly serious. Indices had already slumped on Monday, with Shanghai suffering its heaviest loss in three years, after Trump threatened to hike tariffs on $200bn of Chinese goods this week amid apparent setbacks in trade talks between the economic superpowers. Some quickly dismissed the move as Trump-style brinkmanship, but many market players decided they would rather not take any chances. “Smoke continues to linger across market sentiment following the smoke grenade President Trump launched over the weekend with the threat of adding further tariffs on Chinese imports at the end of the week,” said Lukman Otunuga, a research analyst at FXTM. Trump’s remarks completely wrongfooted markets, coming just days after officials on both sides had sounded positive on the talks. “Say what you want about the US president… but predictability and subtlety were never part of his election pledges,” OANDA senior market analyst Jeffrey Halley said. Stephen Innes at SPI Trading called the turmoil “the latest Tariff Man-triggered trade kerfuffle”, warning that the downside to financial markets of a trade war could be huge. “If you thought the recent tumult was vicious, trust me ‘you ain’t seen nothing yet’ if indeed trade tensions escalate further,” he said. Equities could be facing a correction of 5-10%, Innes warned. Wall Street’s Dow index, which started the day with a loss of 200 points, was off by more than 400 points by the end of the New York morning. European stocks were down by more than 1.5% at the close – with a growth outlook downgrade for the eurozone not helping matters. London’s FTSE 100 was down 1.6 % to 7,260.47 points, Frankfurt’s DAX 30 lost 1.6% to 12,092.74 and Paris’s CAC 40 was down 1.6% at 5,395.75 points at close yesterday. Earlier, Shanghai’s index recovered slightly, having lost a whopping 5.6% the previous session, but Tokyo slumped further. The International Monetary Fund warned that tensions between the economic superpowers were a “threat” to the world economy. On currency markets, the yuan stabilised after being hammered Monday, though most other higher-yielding, riskier units managed to claw back some of their losses. But not the Turkish lira, which slipped back into crisis mode with a heavy fall before rebounding somewhat. The lira “has come back onto investors’ radars… triggered by election shenanigans in the country”, said Fiona Cincotta, senior market analyst at City Index traders. Turkish President Recep Tayyip Erdogan yesterday welcomed an order to re-run the recent Istanbul election, a move the opposition has branded an attack on democracy. His ruling Justice and Development Party (AKP) lost the mayorship of Turkey’s biggest city by a narrow margin and refused to accept defeat. Sterling slid nearly half a percent on Monday on rising concerns about the progress of Brexit negotiations and worries Prime Minister Theresa May is facing a mounting challenge to her leadership. May is set to meet Graham Brady, chairman of an influential committee representing members of parliament from her Conservative party, amid calls for her to set a date to step down, the BBC reported. “Currently Theresa May is walking on thin ice as the latest reports indicate a revolt against her could take place. MPs (Members of parliament) are probably not satisfied with cross-party talks so far. Therefore the pound is being dragged down as another dose of uncertainty hits the market,” said Marc-André Fongern of MAF Global Forex. The British currency was generally weak across the board, reserving some of its biggest losses against the dollar and the low yielding Japanese yen. Against the dollar, the pound slipped as much as 0.5% to $1.3040 before recovering slightly to trade 0.4% down at $1.3051. It also weakened a quarter of a percent against the euro at 85.69 pence and 0.7% against the yen at 144.21 yen. A dollar rising at the start of the US trading session also hit the pound. “There is broad dollar strength across the board but it is being felt more acutely through sterling,” said Kamal Sharma, a director of G10 FX strategy at bank of America Merrill Lynch. Britain’s Conservative government and the opposition Labour Party resumed Brexit talks to try to find a way to break the deadlock in parliament over the country’s departure from the European Union. May agreed a withdrawal deal with the EU last year, but it was rejected three times by a deeply divided British parliament. That delayed the exit date, a postponement that has weighed on the pound as investors fret about prolonged political uncertainty. Sterling has traded in a narrow range of $1.28-$1.31 since Britain pushed its scheduled departure from the European Union back from March until October 31. There is still little clarity about when, how, or even if, Brexit will happen. Investors have been broadly impervious to tepid economic data recently and even relatively hawkish comments from the bank of England last week failed to jolt the currency. Overall volatility in the currency markets remained near five-year lows and net positions by hedge funds in sterling have slipped back into negative territory.
