Picture: GETTY IMAGES/SU YANG/VCG
Picture: GETTY IMAGES/SU YANG/VCG

London — World shares tumbled for a fourth day running on Thursday after a warning from US President Donald Trump that a long worked-on trade deal with China was in serious danger.

Chinese vice-premier Liu He was heading to Washington for two days of talks but Trump’s insistence that China “broke the deal”, and then Beijing’s response that it would retaliate against tariffs were ratcheting up the stakes.

Europe’s main stock markets sank almost immediately after a torrid day for Asia had taken 1.8% off China and more than 3% off South Korea, which is often seen as the bellwether for how this trade war hits home.

Both countries’ currencies were hit too, the won skidding to a more than two-year low and the yuan to a four-month trough, which kept traders buying the traditionally safe yen and US and German bonds instead.

“Markets remain on edge ahead of the Chinese vice-premier’s visit to Washington today,” Rabobank analyst Bas van Geffen said. “Doubt that this tariff increase can be avoided is growing,” he added as Goldman Sachs also put the chance of a hike at 60%.

If talks do fall short, Washington has promised to raise tariffs on $200bn of Chinese goods to 25% from 10% at 4.01am GMT on Friday. For economists, the worry is that it will further slow the global economy.

Kazuhiko Fuji, senior fellow at RIETI, a Japanese government-affiliated think-tank, said the trade talks looked fragile. “I suspect the US will just hand China an ultimatum. No wonder the US yield curve is almost inverting again.” 

The yield spread between three-month US government bonds and the 10-year notes shrank to three basis points, compared with about 15 a few weeks ago. The closely watched spread turned negative in late March, spooking investors, who read the development as portending a recession.

The benchmark 10-year US treasury yield stood at 2.4423% in Europe, having touched its lowest level in five weeks of 2.426% on Wednesday.

Wall Street futures pointed to a 0.85% lower start after a choppy previous session had seen the Dow Jones Industrial close fractionally higher but the S&P 500 and Nasdaq drop 0.2% and 0.3%.

Taxi!

As well as the trade headlines, traders will also be closely watching the pricing on ride-hailing firm Uber’s initial public offering (IPO), which is set to be the biggest of the year so far.

“In the event of a complete breakdown in talks and higher tariffs, we would expect this to see US stocks trade 10% to 15% below their highs and a fall of around 15% to 20% in the Chinese market,” Mark Haefele, global chief investment officer at Global Wealth Management at UBS, said.

In the currency market, the yen surged to a three-month high of ¥109.64 while China’s yuan fell 0.5% to hit a four-month low of 6.838 and was headed for its worst four-day decline in a year.

Sterling, meanwhile, tried to brush off signs that Brexit talks between Britain’s government and the main opposition party may soon collapse to claw back above the psychologically key $1.30 level.

Commodity markets also felt the US-China trade strains.

Brent crude futures dropped 0.6% to $69.92 a barrel, while US West Texas Intermediate (WTI) crude also retreated 0.6% to $61.75 despite a surprise fall in US crude stockpiles.

Benchmark London copper hit its lowest in nearly three months, going as low as $6,111 a tonne.

Reuters