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Global stocks extended already substantial losses on Tuesday, after Washington tagged China a currency manipulator, shaking fragile investor sentiment in a rapid escalation of the US-China trade war.
Safe-haven assets, including bonds and some currencies such as the yen and Swiss franc, benefited as investors scurried to avoid risk.
In early European trade, the pan-region Euro Stoxx 50 futures were down 0.2 per cent, German DAX futures slipped 0.15 per cent and Britain's FTSE futures lost 0.4 per cent.
US Treasury Secretary Steven Mnuchin said on Monday the government had determined that China is manipulating its currency, and that Washington would engage the International Monetary Fund to eliminate unfair competition from Beijing.
“Officially labelling China a currency manipulator gives the US a legitimate reason to take even more steps,” said Norihiro Fujito, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
“The markets are now scrambling to factor in the possibility of the US imposing not only an additional 10 per cent of tariffs on Chinese imports, but the figure being raised to 25 per cent. This is likely to be a protracted trade war without a quick resolution.”
US President Donald Trump vowed last week to impose a 10 per cent tariff on $300 billion of Chinese imports from September 1, adding that it can be raised beyond 25 per cent. Some economists reckon the global economy could slip into recession in the coming months if the tariff is increased to 25 per cent.
The Trump administration's dramatic move against China hastened the risk aversion seen in global markets this week. On Monday, China let the yuan slide in response to the latest US tariffs, which are expected to further aggravate trade tensions between the world's two largest economies.
MSCI's broadest index of Asia-Pacific shares outside Japan was down 0.75 per cent after brushing its lowest since January. It has lost 3.7 per cent so far this week. The Shanghai Composite Index retreated 1.4 per cent. Japan's Nikkei shed 0.7 per cent, Australian stocks fell 2.3 per cent and South Korea's KOSPI slid 0.9 per cent.
“Hedge funds and other speculators who have bet on stocks have not finished closing down their positions yet. There will likely be another wave of selling in stocks,” said Masanori Takada, cross asset strategist at Nomura Securities.
“The sudden surge in volatility is likely to prompt risk parity players to pull out possibly up to $20 billion from global stocks and buy bonds.”
YUAN'S SLIDE STALLS
The onshore Chinese yuan fell to an 11-year low early on Tuesday, brushing 7.0699 per dollar. In a symbolic move, Beijing let the yuan breach 7-per-dollar on Monday for the first time since late 2008. But the Chinese central bank's mid-point fixing on Tuesday of 6.9683 was firmer than market expectations, and the yuan's retreat slowed.
China's offshore yuan stretched the previous day's slide, and briefly weakened to 7.1382, the lowest since international trading in the Chinese currency began in 2010. But it pulled back to 7.0469 after Beijing's firmer-than-expected yuan fixing on Tuesday.
The Japanese yen, a perceived safe-haven in times of market turmoil and political tensions, touched a seven-month high of 105.520 per dollar before dropping back to 106.700 in volatile trade.
The Swiss franc, another currency sought in times of turmoil, has gained roughly 1 per cent against the dollar this week. It set a six-week peak of 0.9700 franc per dollar.
Investor demand for other safe-havens such as government bonds also remained high as risk aversion gathered momentum.
The 10-year US Treasury yield extended sharp falls overnight and declined to 1.672 per cent, its lowest since October 2016. Japan's 10-year yield fell to a three-year trough of minus 0.215 per cent.
Brent crude oil futures plumbed a seven-month low of $59.07 per barrel as the trade war raised concerns about lower demand for commodities. Brent last traded at $60.41 for a gain of 1 per cent as bargain hunting kicked in.
Spot gold advanced to a six-year peak of $1,474.80 an ounce as investors sought the safety of the precious metal.
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