Asian shares hit 3-1/2 month low as trade war intensifies

Fresh volleys in the US-China tariff war pressured Asian shares on Tuesday, but comments from US President Donald Trump that he expects trade negotiations to be successful eased some worries.

Chinese markets that were pummelled in early trade, swung in and out of the red amid signs of state support, but ended the day lower.

Late on Monday, Trump said trade talks with China are “going to be very successful”. That helped lift US stock futures, which had been down, to be more than 0.4 per cent up, though sentiment remained fragile.

European shares were expected to take their lead from US futures. In early European trades, the pan-region Euro Stoxx 50 futures were up 0.3 per cent at 3,296, German DAX futures were 0.07 per cent higher at 11,890.5 and FTSE futures were up 0.14 per cent at 7,140.

China on Monday announced it would impose higher tariffs on $60 billion of US goods following Washington's decision last week to hike its own levies on $200 billion in Chinese imports.

MSCI's broadest index of Asia-Pacific shares outside Japan was down 1.1 per cent on Tuesday afternoon. The index had earlier fallen as much as 1.25 per cent to its lowest since January 30.

Prakash Sakpal, Asia economist at ING in Singapore, said the current volatility showed how a “180-degree” turn in US rhetoric on trade negotiations had spooked markets.

“We don't see any quick end to this state of the markets until we see some resolution, constructive dialogue and something very solid in terms of deals. But the hopes for that are a bit misplaced currently,” he said.

Broader Asian markets were dragged lower by sagging Chinese shares, with the MSCI China index dropping 1.8 per cent. China's blue-chip CSI300 index finished the day down 0.6 per cent, with suspected state-backed buying of equities helping to stem further losses.

“Politicians may be willing to focus less on the market impact until things get more severe, making it doubtful there will be an early resolution to the current breakdown in negotiations simply based on market moves,” said Kerry Craig, global market strategist at J.P. Morgan Asset Management.

“Furthermore, as there isn't a clear schedule for meetings between Chinese and US negotiators, markets are likely to be more volatile.”

Australian shares finished down 0.9 per cent, while Japan's Nikkei stock index closed 0.6 per cent lower after touching its lowest level since mid-February.

The US Trade Representative's office on Monday said it planned to hold a public hearing next month on the possibility of imposing duties of up to 25 per cent on a further $300 billion worth of imports from China.

The tariff escalation has rattled global markets, even as Trump said he would meet Chinese President Xi Jinping next month.

On Monday, the Dow Jones Industrial Average fell 2.38 per cent to 25,324.99, the S&P 500 lost 2.41 per cent to 2,811.87 and the Nasdaq Composite dropped 3.41 per cent to 7,647.02.

As investors flocked to safe-haven assets, US Treasury yields remained near six-week lows early on Tuesday, though they moved higher following Trump's comments. Benchmark 10-year Treasury notes last yielded 2.4086 per cent compared with a US close of 2.405 per cent on Monday.

The two-year yield, which rises with traders' expectations of higher Fed fund rates, was at 2.1945 per cent, up from a US close of 2.193 per cent. But data from CME Group continued to show a more than 70 per cent chance of the Fed cutting rates by the end of 2019.

Underscoring market concerns over the economic impact of the trade war, 10-year yields once again ticked below those on three-month Treasury bills. A sustained inversion of this part of the yield curve has preceded every US recession in the past 50 years.

On Monday, some traders were concerned that China, the largest foreign US creditor, could dump Treasuries to counter the Trump administration's hardening trade stance. But most analysts downplayed such a possibility.

“If China did start to (sell Treasuries) it will galvanise both sides of politics in the US against China and the Fed would be sent into the market to buy bonds,” Greg McKenna, strategist at McKenna Macro said in a note to clients.

“That would expand its balance sheet but it would allow it to neutralise China's efforts to disturb US financial markets. So I doubt they'll try to sell Treasuries.”

After earlier falling against the yen, the dollar strengthened 0.31 per cent against the Japanese currency to 109.64 .

The single currency was up less than 0.1 per cent on the day at $1.229, while the dollar index, which tracks the greenback against a basket of six major rivals, was mostly unchanged at 97.311.

China's offshore yuan hit a fresh 2019 low early in Asia on Tuesday before rebounding. It was last trading at 6.9009 per dollar, up 0.17 per cent on the day.

Its onshore counterpart strengthened slightly to 6.8767 per dollar after touching four-month lows on Monday, sparking speculation China's central bank may be letting the currency weaken amid the intensifying trade war.

Oil prices edged higher, buoyed by Wst Asian tensions though gains were checked by trade war concerns. Saudi Arabia said two of its oil tankers were among those attacked off the coast of the United Arab Emirates, describing it as an attempt to undermine security of supply amid US-Iran tensions.

US crude was 0.3 per cent higher at $61.23 per barrel, while Brent crude gained 0.4 per cent to $70.49 per barrel.

Elsewhere, gold gave up gains after earlier rising amid broader market jitters. Spot gold edged lower to $1,297.12 per ounce. Bitcoin gained 4 per cent to $8,120.

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