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.

Italy’s huge debt pile is expected to rise this year as the country’s economy limps along, the European Commission said yesterday in quarterly forecasts that could reignite a dispute with Rome over its budget. Brussels marginally cut its 2019 growth outlook for Italy to 0.1% from an already gloomy 0.2%. The economy expanded 0.9% last year. The commission also said it expected growth in the wider eurozone economy to slow more than previously estimated, to 1.2%. But its forecast for Italy is the lowest in the bloc, and the Commission said it expected that to weigh on the country’s public finances, with debt and deficit levels seen climbing far beyond EU fiscal rules. The Commission’s forecasts were drawn up before data showed Italy emerged from recession in the first quarter with stronger-than-expected growth of 0.2%, and the government says its policies to raise welfare benefits will support domestic demand. Economy Minister Giovanni Tria shrugged off Brussels’ forecasts, saying they were broadly in line with the government’s own projections. Rome forecasts growth of 0.2% this year and 0.8% in 2020, 0.1 points above the Commission for each year. Tria told reporters in Paris that the Commission’s public finance projections for next year were “more political than economic”, because they took no account of the government’s commitments to reduce the deficit in its 2020 budget. Although no EU decision over possible disciplinary moves is expected before European elections on May 23-26, the more downbeat estimates could increase market pressure on a coalition government in Rome already plagued by infighting. Milan shares fell after the Commission’s forecasts were published and the yield gap widened between Italian government bonds and safer German Bunds. The commission — which came close to penalising Italy over an excessive deficit target before the two side reached an agreement in December — will assess states’ compliance with EU rules at the beginning of June, economics commissioner Pierre Moscovici said. Without policy changes, Italy’s deficit would be 2.5% of gross domestic product (GDP) this year, the commission said, lowering a 2.9% forecast it made in November. The bloc’s executive forecast the deficit would climb to 3.5% in 2020, beyond the EU’s 3.0% ceiling. The government has targeted a deficit of 2.4% this year and 2.1% in 2020. The commission expects Italy’s debt to grow to 133.7% of GDP this year and peak at 135.2% in 2020, while Rome is targeting 132.6% this year and 131.3% in 2020. Eurozone countries with a debt rate above 60% are required to gradually reduce it. But Italy’s has been growing since last year, when it cost 3.7% of economic output to service. With Italian bond yields having dropped slightly after December’s budget deal with Brussels, interest expenditure is forecast to drop to 3.6% of GDP this year, before rising again in 2020. The structural deficit, which excludes one-off items and the effects of the business cycle, is also expected to worsen. This indicator is crucial in the EU assessment over countries’ compliance with fiscal rules. The primary surplus, which excludes interest payments, is expected to ease. Italy is the only eurozone country in which the commission expects employment to fall this year, by 0.1%. The government has also forecast that employment will decline this year. Both Brussels and Rome expect it to rise in 2020. Brussels also singled out Italy as the only state where investments will fall, by an estimated 0.3%. Italy’s fiscal outlook could worsen if yields rose again, but would improve if spending was reduced and a planned rise of sales tax was applied next year, the Commission said.

India’s rules on localisation of data and price caps on medical devices imported from the United States are barriers to trade but New Delhi is committed to addressing them after the country’s elections, US Commerce Secretary Wilbur Ross said yesterday. Speaking at a business conference in New Delhi, Ross said there were still overly restrictive market barriers in India. The United States is India’s second-biggest trade partner after China. “We applaud India’s commitment to addressing some of these barriers once the government is re-formed, probably starting in the month of June,” Ross said in a speech.

India’s 39-day general election ends on May 19, and votes will be counted four days later. Ross met his Indian counterpart Suresh Prabhu on Monday, after which New Delhi said that the two countries would engage regularly to resolve outstanding trade issues. India and the United States are locked in disputes over tariffs, price caps India has imposed on imported US medical devices, and rules banning companies from selling products via firms in which they have an equity interest. Ross said India’s recent push to force foreign companies to store more of their user data locally was a hindrance to trade. “Our role is to eliminate barriers to US companies operating here, including, data localisation restrictions that actually weaken data security and increase the cost of doing business,” he said. Last year, global payments companies including Mastercard, Visa and American Express unsuccessfully lobbied India to relax central bank rules requiring all payment data on domestic transactions to be stored locally. Ross said India’s 2017 decision to cap prices of medical devices made in the United States was also an issue. US President Donald Trump announced in March that he would end preferential trade treatment for India that allows duty-free entry for up to $5.6bn worth of its exports to the United States. “As President Trump has said, trade relationships should be based and must be based on fairness and reciprocity. But currently, US businesses face significant market access barriers in India,” Ross said. “These include both tariff and non-tariff barriers as well as multiple practices and regulations that disadvantage foreign companies.” US goods and services trade with India totalled an estimated $142.1bn in 2018, with the United States running a deficit of $24.2bn.

Frontier Spinning Mills, Inc. has received a substantial capital investment from two leading investment management companies. Affiliates of Cerberus Business Finance and TCW Asset Management Company are providing new capital and operating expertise to support Frontier Spinning and help drive the United States-based company’s future growth. Frontier Spinning operates five state-of-the-art manufacturing facilities in North Carolina and Alabama and employs approximately 1,200 team members. It will continue to be led by Robin Perkins, Frontier Spinning chief executive officer, and the rest of the current management team, as it looks to expand its leading market position in partnership with Cerberus and TCW. “We are proud of the long-standing relationships we have with our customers and the ability to offer them a high-quality, reliable product supply,” said Perkins. “We are excited to begin our Company’s next phase of growth with partners that not only bring exceptional financial acumen, but also substantial industry and operating expertise.” “Over the past two decades, Frontier Spinning has become an industry-leading business, supported by a portfolio of high-quality products and strong customer relationships. In partnership with the talented team at Frontier Spinning, we look forward to helping the company capitalise on strategic opportunities, while continuing to deliver for their customers every day,” Joseph Naccarato, chief operating officer of Cerberus Business Finance and senior managing director of Cerberus, said.

Chinese investors, caught off guard by US President Donald Trump’s tariff threats, dumped stocks and sold the yuan currency yesterday as a fresh deterioration in Sino-US trade tensions roiled Asian financial markets. The country’s major stock indexes fell the most in more than three years. The blue-chip CSI300 index and the Shanghai Composite Index both tumbled more than 5%, posting their steepest single-day drop since February 2016. Around 1,000 mainland firms plummet the maximum allowed 10% daily limit. Market sentiment was lifted somewhat after China said its trade delegation is preparing to go to the United States. Hong Kong’s Hang Seng index ended down 2.9%, recouping some lost ground in the late afternoon session. “Afternoon trading was quieter. MOFCOM’s announcement helped, at least people know that the negotiations will carry on,” said Steven Leung, sales director at broker UOB Kay Hian in Hong Kong. The yuan’s losses also narrowed after the news, closing at 6.7666 per dollar in onshore trade. In earlier trade, the yuan dropped to as low as 6.7994 per dollar, its weakest level in 3-1/2 months, while the offshore yuan fell as much as 1.3%. Trump stunned global markets with a tweet late on Sunday announcing he would hike US tariffs on $200bn worth of Chinese goods this week and target hundreds of billions more soon, saying trade talks with China were going too slowly. Markets had largely priced in expectations that a trade deal would be reached soon, further reducing pressure on China’s economy, which has recently shown tentative signs of steadying. Fanning expectations that fresh trade uncertainty could lead to additional monetary easing, China’s central bank said yesterday it would cut reserve requirement ratios (RRRs) for small and medium-sized banks. Yields on 10-year Treasury bonds slipped to 3.387%, a two-week low. Trump’s move marked a major escalation in trade tensions between the world’s two largest economies and raises the prospect of a collapse in the trade talks which would further pressure the global economy. “The market is re-pricing the situation, as investors had thought trade negotiations were coming to an end,” said Ken Cheung, senior Asian FX strategist at Mizuho Bank in Hong Kong. “If the trade war reignites, some market participants may speculate about renewed yuan depreciation to counteract the negative impact from rising tariffs,” he said. But China’s bond market would benefit from “diversion from equities, and renewed expectation for easing,” said Frances Cheung, head of Asia macro strategy at Westpac in Singapore. China’s Vice Premier Liu He is “very unlikely” to go to the United States this week following Trump’s “threat” to hike tariffs, the editor-in-chief of China’s influential Global Times said yesterday. The newspaper is published by the ruling Communist Party’s People’s Daily but is not considered an official publication and does not speak for the government. Chinese officials were scheduled to meet their US counterparts in Washington on Wednesday after meeting in Beijing last week for a round that Treasury Secretary Steven Mnuchin described as “productive.” “Optimism toward the trade talks turned into pessimism overnight,” said Stephen Huang, chief risk officer at Shanghai See Truth Investment Management. “The government needs to roll out more stimulus to stabilise the market,” he said, expecting broader reductions in reserve ratios, and even a possible cut in interest rates. Stocks fell across the board on Monday, with technology shares among the worst casualties. The agriculture sector was the only bright spot, with shares including Hefei Fengle Seed Co and Great-Sun Foods Co surging 10% on expectations they could benefit if Beijing retaliates against US imports if Washington hikes tariffs. Chinese shares have surged some 30% so far this year, partly due to optimism that a trade deal would be reached, but they have pulled back in recent weeks as investors scaled down expectations for further stimulus in light of better March economic data. “In the near term, investors are rightfully worried since the lingering threat of a trade war weighed on risk assets in 2018, especially in Asia,” Tai Hui, Chief Market Strategist, Asia Pacific, JP Morgan Asset Management, said in a note. But Huang at Shanghai See Truth Investment said that unlike 2018, when Chinese stocks suffered from a double-whammy of the trade war and Beijing’s clampdown on debt, “liquidity conditions are much better this year.” In a move to bolster domestic growth, China’s central bank said yesterday it would cut reserve requirements for small and medium-sized banks. The People’s Bank of China (PBoC) said in a statement that the reduction will release about 280bn yuan ($41.25bn) in long-term funding, which will be used for loans to small and private companies. Such a move had been expected this year, but it was announced right before China’s stock market opened, and just hours after Trump’s tweets. While the move failed to provide any immediate support to market sentiment, it was expected to give some help to parts of the economy affected by the trade war and a wider slowdown. “It is in line with the domestic need, which is targeted, while the timing is convenient in view of the heightened external risk,” said Westpac’s Cheung.