Picture: 123RF/SOLAR SEVEN
Picture: 123RF/SOLAR SEVEN

London — European shares fell on Wednesday from four-year highs after US President Donald Trump threatened to “substantially” increase tariffs if China fails to agree a trade deal, and also took a swipe at EU trade policies.

Concern is also growing that the intensifying unrest in Hong Kong could prompt a Chinese crackdown, pushing Hong Kong shares 2% lower and weighing on markets across Asia.

MSCI’s index of world shares slipped 0.2%, following a 1% fall in Asian shares excluding Japan. Japan’s Nikkei slipped almost 1%, moving further off last week’s 13-month highs.

“The market was anticipating something more positive from Trump, but he didn’t deliver,” said Justin Onuekwusi, a portfolio manager at Legal & General Investment Management. “In recent weeks, we saw the balance of probabilities shift to the positive side, risks being taken off the table, but people have realised that risk is still there.” He’s been reducing his equity allocations, he said.

Trump’s speech threatened to raise tariffs on China, but he also said a trade deal was “close”, without offering details on when or where it would be signed. He also criticised EU trade policies before a November 14 deadline to decide whether to raise tariffs on European and Japanese carmakers.

That deadline will probably be extended, but investors remain jittery. A pan-European equity index opened half a percent lower, coming off Tuesday’s four-year highs, when optimism before Trump’s speech and better-than-expected economic indicators from Germany boosted stock.

An index of European automotive companies slipped 1.3%.

Expectations for phase one of a trade deal in November have supported stocks and riskier assets recently. Investors were led to cut the share of cash in their portfolios to six-and-a-half-year lows, according to Bank of America Merrill Lynch’s monthly survey of global managers.

The poll also showed growth optimism at 18-month highs.

However, lack of progress on an agreement has started to increase doubts about whether a trade truce will happen at all.

“I’m absolutely concerned. The clock is ticking,” said Michael McCarthy, chief market strategist at CMC Markets in Sydney. “Markets are now expecting substantial progress in the next week or so, and if not, then confidence could crumble.”

Equity futures suggested US stocks would open lower, with the S&P 500 indicated down 0.2%. The S&P closed up on Tuesday, backing off record highs after Trump’s speech.

The S&P 500 has risen 2% in November and 23% so far in 2019 thanks to interest rate cuts, trade hopes and robust corporate earnings — profits at three-quarters of S&P 500 companies have topped expectations this quarter, according to Refinitiv. European shares have gained 2.3% this month.

However, a more prolonged stand-off will revive fears for the world economy. Oxford Economics estimates the trade war has trimmed 0.8 of a percentage point off US growth. Having started 2019 with 3.1% growth, the economy eased to 1.9% in the third quarter, they noted

Asian markets were also rattled, by Trump’s speech and Hong Kong’s turmoil. Onshore spot yuan fell to a low of 7.0270 per dollar at one point, the weakest since November 5.

Hong Kong protesters planned to paralyse parts of the city for a third day, with transport, schools and many businesses closing after violence escalated across the city.

Hong Kong interbank rates rose, with one-month Hong Kong inter-bank fffered rate at its highest since August 6. London-listed shares in HSBC fell almost 2%. But the New Zealand dollar rose more than 1% to $0.6402 after the central bank unexpectedly left interest rates on hold at 1%.

The dollar gained 0.10% against a basket of currencies, just off three-week highs. Yields on 10-year IS treasury notes held off recent three-month highs. Bond yields dipped across the eurozone as well. US markets are waiting for data later on Wednesday that is expected to show inflation rose in October. US Federal Reserve chair Jerome Powell will also provide testimony to a Congressional committee.

Reuters