US stocks staged a comeback on Monday despite tensions between Washington and Beijing resurfacing and traders following famed investor Warren Buffett in ditching airlines shares.
The S&P 500 pared back earlier losses and rose 0.4 per cent, while the tech-heavy Nasdaq Composite closed up 1.2 per cent. Their rebound followed weakness in Asian and European stocks.
The latest sharp sell-off in US airlines was triggered Mr Buffett’s admission over the weekend that Berkshire Hathaway had dumped $6bn of investments in the sector. The industry would be substantially changed by the coronavirus pandemic, he said on Saturday.
Shares in the four largest US carriers, United, American, Delta and Southwest, all closed down at least 5 per cent, though off their worst levels.
By the end of Monday, traders had also worked through renewed tension between the US and China, including claims reiterated on Sunday by Mike Pompeo, US secretary of state, linking the coronavirus outbreak to a laboratory in Wuhan. Beijing has denied the allegations.
“Global equities have fallen back in recent days and could come under more pressure in the near-term if tensions between the US and China continue to rise,” Capital Economics analysts wrote in a note to clients. “However, the latest flare-up between them does not alter our broader view that most equity markets have further to rise this year.”
In Europe, the benchmark Stoxx 600, which tracks the region’s largest companies, closed down by 2.7 per cent. The losses were sharpest in continental Europe, where markets had missed out on Friday’s sell-off because of a public holiday. In Frankfurt, the Dax fell 3.6 per cent, while the CAC 40 in Paris was 4.4 per cent lower. London’s FTSE 100, which had fallen more than 2 per cent in the previous session, slipped a further 0.2 per cent.
Jeffrey Kleintop, chief global investment strategist at Charles Schwab, said there was “genuine concern” among investors about souring relations between the world’s two largest superpowers, adding that it creates “further vulnerability” to an economy that is already on shaky footing.
“We don’t know what the recovery is going to look like,” he said. “If the recovery takes longer than currently expected and if we get another surge in virus cases, stocks are headed back to their lows.”
Kit Juckes, a strategist at Société Générale, added: “The last thing we need is more trade war.”
Strategists at Bank of America said their discussions with clients had revealed “a fairly unanimous view that the US-China relationship would worsen moving ahead”.
The Wall Street bank said the biggest risk was the sustainability of the “phase one” trade deal signed in January after months of negotiations.
The re-emergence of US-China trade tensions also weighed on the price of industrial metals. Copper extended its decline from its late-April high of $5,250 a tonne, trading as low as $5,060 on Monday. Aluminium dropped 0.7 per cent to $1,487.
Weak manufacturing data and the absence of Chinese buyers because of a public holiday added further pressure on the sector.
“As the global economy looks to escape its current lockdown, May is likely to be a test month and for that reason risk appetite is likely to remain muted at best,” said Alastair Munro, a metals trader at brokerage Marex Spectron.
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Asian stocks also dropped on Monday. Hong Kong’s benchmark Hang Seng fell 4.2 per cent while South Korea’s Kospi slid 2.9 per cent. Markets in Japan and mainland China were shut for holidays.
Meanwhile, oil benchmarks shrugged off persistent worries about oversupply and inadequate storage. West Texas Intermediate, the US marker, rose 5 per cent to $20.75 a barrel while Brent crude, the international benchmark, ticked higher by 4.4 per cent to $27.61.
US oil prices last month collapsed into negative territory for the first time as the rising cost of increasingly scarce storage pushed producers to pay buyers to take the product off their hands.
But 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”.