Chinese markets. Picture: AFP/FRED DUFOUR
Chinese markets. Picture: AFP/FRED DUFOUR

Tokyo — US stock futures and Asian shares tumbled on Thursday after Canadian authorities arrested a top executive of Chinese tech giant Huawei for extradition to the US, feeding fears of a fresh flare-up in tensions between the two superpowers.

The news came as Washington and Beijing begin three months of negotiations aimed at de-escalating their bruising trade war, which is adding to lingering investor jitters over higher US interest rates and other risks to global economic growth.

S&P500 e-mini futures fell almost 2% at one point in thin Asian morning trade and were last were down 1.3%.

The losses in the first few minutes of trading might have been even steeper, but CME Group’s Chicago Mercantile Exchange implemented a series of 10-second trading halts that helped limit the initial drop.

Japan’s Nikkei slumped 1.8% by the midday break, with semi-conductor related shares leading the losses. Huawei is one of the world’s largest makers of smartphones and telecommunications network equipment.

MSCI’s ex-Japan Asia-Pacific index fell 1.7%. Hong Kong’s Hang Seng dropped 2.7% while Shanghai shares dipped 1.2%.

Canadian authorities said they had arrested Huawei’s global chief financial officer in Vancouver, where she is facing extradition to the US.

The arrest is related to violations of US sanctions, a person familiar with the matter said, although officials have so far stayed mum on her allegations.

The arrest heightened the sense of a major collision between the world’s two largest economic powers not just over tariffs but also over technological hegemony.

Britain’s BT Group said it was removing Huawei’s equipment from the core of its existing 3G and 4G mobile operations. Australia and New Zealand have also rejected Huawei’s products.

“The US has been telling its allies not to use Huawei products for security reasons and is likely to continue to put pressure on its allies,” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

“So while there was a brief moment of optimism after the weekend US-China talks but the reality is, it won’t be that easy,” he said.

Hong Kong-listed shares of Chinasoft International shed as much as 13% in response to news of the arrest. Huawei is a key client of Chinasoft.

Worries about slower US growth

Markets had initially brightened after US and Chinese leaders agreed a temporary trade truce at a meeting on Saturday. But the mood has quickly soured on scepticism that the two sides can reach a substantive deal on a host of hugely divisive issues within the tight 90-day time frame set out.

The benchmark treasury 10-year yield fell 1.8 basis points to 2.903%, near Tuesday’s three-month low of 2.885%. US markets were closed on Wednesday to mark the death of former president George HW Bush.

The yield curve remained inverted between two- and five-year zones, with five-year notes yielding 2.780%, below 2.797% on two-year notes.

“Worries about a US economic slowdown are deepening as housing and other interest rate-sensitive sectors seem to have been hit,” said Shuji Shirota, head of macroeconomic strategy at HSBC.

“If the upcoming US jobs data on Friday shows some weakness, markets will face a major challenge,” he added.

The inversion is a symptom of a weak economy, said Bryan Whalen, group MD of TCW in Los Angeles, noting the US economy has not been able to achieve sustainable economic growth of more than 2% in recent years.

“If the US couldn’t break the 2% growth environment, with zero-bound interest rates and a rapidly expanding balance sheet early in the economic cycle, why would you ever think we could do it when interest rates are rising and balance sheet is shrinking and we are basically nine to 10 years into an ageing economic cycle,” he said.

“It’s hard to envision a scenario where US growth doesn’t dip down, if not kind of going into a recession.”

Oil prices fell slightly in tepid trading ahead of a meeting by producer group Opec that is expected to result in a supply cut aimed at draining a glut that has pulled down crude prices by 30% since October.

A monitoring committee of Opec and its allies, including Russia, agreed on the need to cut oil output in 2019, two sources familiar with the discussions said.

Still, lack of details could suggest such an agreement could be elusive, some analysts also said.

US West Texas Intermediate (WTI) crude futures were at $52.63 a barrel at 2.48am GMT, down 26c, or 0.5%, from their last close. Brent crude oil futures were down 19c, or 0.3%, at $61.35 a barrel.

In the currency market, the dollar fell 0.4% against the yen to ¥112.78 on a risk-averse mood while the Australian dollar shed 0.6% to $0.7227.

The yuan eased 0.2% to 6.8770 to the dollar in offshore trade while the euro traded flat at $1.1345.

Sterling dipped 0.1% to $1.2725 as Prime Minister Theresa May’s Brexit deal faced fresh criticism from allies and opponents alike.