Global stocks drop as US-China tension flares

Global stocks fell on Monday as tension flared between the US and China over the origin of the coronavirus pandemic.

London’s FTSE 100 slipped 0.5 per cent in early trading, while the losses were sharper in continental Europe, where markets had missed out on Friday’s sell-off due to a public holiday.

In Frankfurt, the Dax fell 2.9 per cent, while the CAC 40 in Paris was 3.1 per cent lower. The benchmark Stoxx Europe 600 tracking the region’s largest companies slid 2.1 per cent.

The latest declines for global equities came after Mike Pompeo, US secretary of state, on Sunday reiterated US government claims linking the coronavirus outbreak to a laboratory in Wuhan, China, without providing any evidence. China has denied that the virus came from the lab.

In a television interview, Mr Pompeo also said China was blocking access to information and refusing to co-operate with overseas scientists trying to develop a vaccine.

“The last thing we need is more trade war,” Kit Juckes, a strategist at Société Générale, said.

Futures markets tipped the S&P 500 to drop 0.5 per cent when trading begins on Wall Street later on Monday.

On Friday, the US benchmark shed 2.8 per cent after US president Donald Trump threatened to use tariffs against Beijing, escalating his attack on China over the origins of the public health crisis. Investors also assessed the corporate impact of the coronavirus pandemic after Amazon warned of higher costs to protect workers.

Analysts said that an upcoming decision in the German constitutional court on the legality of the ECB’s asset purchasing programme was also weighing on sentiment in Europe, as it could undermine the central bank’s Covid-19 response.

“The real event is the Bundesverfassung which could decide that the PSPP [asset purchasing programme] is illegal, sending the entire European periphery into a tailspin,” said Sebastien Galy, strategist at Nordea Asset Management.

Asian stocks fell. Hong Kong’s benchmark Hang Seng index dropped 3.8 per cent, while South Korea’s Kospi index fell 2.7 per cent. Markets in Japan and mainland China were shut for holidays.

With US-China friction re-emerging, the offshore renminbi stabilised, having earlier weakened as much as 0.3 per cent against the US dollar to Rmb7.1561 in Asian trading — the lowest level for the Chinese currency’s less regulated exchange rate in 45 days. Onshore trading, which is more tightly controlled by China’s central bank, was closed due to Monday’s holiday.

Robert Carnell, chief China economist at ING, said the return of trade tensions was weighing on the Chinese currency as the relative stability provided by last year’s “phase one” trade deal came under threat.

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“It is possible that the US administration feels emboldened to restart the trade rhetoric given the rally stocks have undergone in recent weeks,” Mr Carnell said. “If so, Friday’s S&P 500 sell-off comes as a reminder that the underlying drivers for markets have not changed.”

Oil benchmarks also got off to a poor start for the week, hit by persistent worries about oversupply and inadequate storage. West Texas Intermediate, the US marker, was down 5.2 per cent at $18.75 a barrel in early London trading while Brent crude, the international benchmark, dropped 0.2 per cent to $26.35.

The decline in oil prices, which followed their first weekly gain in a month, came as optimism buoyed by output cuts began to slip again.

Last month, US oil prices collapsed into negative territory for the first time as the rising cost of increasingly scarce storage pushed producers to pay buyers to take product off their hands.

Signs of risk aversion were still prevalent on Monday, with a $500m oil exchange traded fund in Hong Kong saying that its broker had blocked it from increasing its holdings of crude oil futures.

Analysts at Citi warned that the “worst is likely yet to come, given signs of global storage reaching tank tops even as a demand recovery starts”.

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