Asia stocks plunge, yuan sinks on trade war escalation; STI down 1.8%


SYDNEY (REUTERS) – Asian shares slid to 6½-month lows on Monday (Aug 5) and the yuan slumped to a more than decade trough as a rapid escalation in the United States-China trade war sent investors stampeding to traditional safe harbours including the yen, bonds and gold.

Markets have been badly spooked since US President Donald Trump abruptly declared he would slap 10 per cent tariffs on US$300 billion (S$414 billion) in Chinese imports, ending a month-long trade truce. China vowed last Friday to fight back.

In response, China’s yuan burst beyond the psychological seven-per-dollar threshold in a move that threatened to unleash a new front in the trade hostilities – a currency war.

“Everything is selling off right now,” said Mr Ray Attrill, head of forex strategy at National Australia Bank in Sydney. “We have no reason to expect any cessation in selling unless we see any strong action to defend any CNY or CNH weakness.” He was referring to the onshore yuan and offshore yuan, respectively.

“Our working assumption is that we are unlikely to see any meaningful resolution to the trade dispute anytime soon.”

Asian share markets were a sea of red, with Japan’s Nikkei shedding 2.4 per cent to the lowest since early June. It was the sharpest daily drop since March.

In Singapore, the Straits Times Index was down -59.68 points or 1.83 per cent to 3,201.43 at the midday trading break.

Australian shares slipped about 1.4 per cent to spend their fourth straight session in the red, and South Korea’s Kospi tumbled 2.2 per cent to hit its lowest since December 2016.

MSCI’s broadest index of Asia-Pacific shares outside Japan sank 2.1 per cent to depths not seen since late January while China’s blue-chip index fell 0.8 per cent.

The troubled Hong Kong market was the worst hit as its embattled pro-Beijing leader on Monday accused pro-democracy protesters of trying to “destroy” the city. Two months of protests and clashes with police have pushed the semi-autonomous southern Chinese city to a “very dangerous situation”, Chief Executive Carrie Lam said as she struck a defiant tone as strikes and travel chaos hit the city.

Hong Kong’s Hang Seng index hit a seven-month low, plunging 796.36 points or nearly 3 per cent by midday.

The pain quickly spread globally, with E-Mini futures for the S&P500 and FTSE futures both down over 1 per cent.

Oil prices were also pulled down again on demand worries, while gold climbed 0.65 per cent to US$1,450.41 an ounce.

The grim mood followed declines on Wall Street last Friday with MSCI’s gauge of world stocks posting its largest weekly loss of the year.

The trade dispute between the world’s two largest economies has already disrupted global supply chains and slowed economic growth.

The abrupt escalation capped a critical week for global markets after the US Federal Reserve delivered a widely anticipated interest rate cut and played down expectations of further easing.

So far, investors are not buying Fed chair Jerome Powell’s claim that the 25-basis-point rate reduction was a mere “mid-cycle adjustment to policy”.

Futures are now pricing in deeper cuts than before last week’s Fed meeting. The terminal US rate is seen at 1.22 per cent, 93 basis points below the current effective rate.

Analysts at TD Securities are forecasting no less than five more cuts from the Fed, amounting to 125 basis points of easing, over the coming year or so.

Bond markets were well ahead of the game as US 10-year yields dived 7 basis points to 1.77 per cent, a violent shift for usually cautious Asian hours. Yields in Australia and New Zealand touched all-time lows.

German 10-year government bond yields last Friday dropped to an all-time low of -0.502 per cent and the country’s entire government bond yield curve turning negative for the first time ever.

The flight to safety lifted the yen, which often gains at time of stress thanks to Japan’s position as the world’s largest creditor. The dollar slipped to a seven-month trough of 105.78 yen, while the euro sank to its lowest since April 2017 at 117.64 yen.

That dragged the dollar index off 0.1 per cent, though it was up against most other Asian currencies and those exposed to China or commodities including the Australian dollar.

The Aussie, a liquid proxy for emerging market and China risk, slipped to a fresh seven-month trough at US$0.6748 after losing 1.6 per cent last week.

The Swiss franc was also boosted by safe-haven demand from the escalating trade tensions. Mr Trump is also eyeing tariffs on the European Union, but has yet to make any formal announcements. The euro was relatively steady on the dollar at US$1.1119.

Sterling hovered near 2017 lows at US$1.2159, pressured by concerns about Britain exiting the EU without a deal in place.

The pound has been whiplashed since late last month when Mr Boris Johnson, a figurehead for the “leave” campaign in the 2016 Brexit referendum, became the country’s prime minister.

Oil extended losses, with US crude off 26 cents at 55.40 and Brent down 35 cents at US$61.54.