Flare-up of Sino-US tensions over Hong Kong knocks world shares off 22-month high

A broker looks at financial information on computer screens on the IG Index trading floor in London, Britain - Reuters

London (Reuters): World stocks were knocked off 22-month highs on Wednesday as a renewed flare-up in Sino-US tensions and the creeping return of US recession fears fuelled a bid for bonds and other “safe” assets such as gold.

European equities tumbled half a percent at the open, edging further off recent four-year highs hit when it had appeared Washington and Beijing were about to agree the first phase of a trade deal. Wall Street futures were marked lower while oil prices suffered their biggest daily loss in seven weeks.

The mood in markets soured after the US Senate angered China by passing a bill requiring annual certification of Hong Kong’s autonomy and warning Beijing against violently suppressing protesters. China demanded the United States stop interfering in its internal affairs and said it would retaliate.

US President Donald Trump also threatened to up tariffs on Chinese goods if a trade deal is not reached soon.

MSCI’s index of Asia-Pacific shares ex-Japan .MIAPJ0000PUS tumbled 0.7%, Japan’s Nikkei .N225 fell 0.8% and Shanghai blue chips .CSI300 lost 1%. MSCI’s global index .MIWD00000PUS slipped 0.3%, ending a three-day winning streak.

Wall Street was tipped for a weaker start with futures ESc1 down 0.2%.

US shares closed just below record highs on Tuesday, however, and world stocks remain just 0.5% off all-time peaks hit last year.

US 10-year Treasury yields, which have fallen in six out of the past seven sessions, slipped 5 basis points to 1.735%, a 2-1/2 -week low US10YT=RR.

German bonds fell for the third straight day to touch a 2-1/2 week low DE10YT=RR, shrugging off European Central Bank Chief Economist Philip Lane’s comment that the euro zone economy would not fall into a recession.

The R word

Moves on commodity prices and bond markets imply fears of economic recession may be creeping back.

Japan’s October exports fanned those fears further, tumbling at their quickest rate in three years, with shipments to China and the United States suffering big falls.

US crude stocks rose far more than expected, the American Petroleum Institute said, driving Brent crude LCOc1 into a 2.6% slide. Brent fell another half percent, inching towards the $60 mark last breached three weeks ago.

A marked flattening of the curve — the gap between two-year and 10-year yields is at its narrowest in more than two weeks — also hints at a return of recession fears. The curve inverted earlier this year, returning to normal only after three US interest rate cuts.

But Federal Reserve officials have hinted there will be no further easing for now, a message the US central bank may reiterate later in the day when it releases minutes from its last meeting. Markets are now pricing in just a 0.8% chance of a December rate cut FEDWATCH.

Dour forecasts from retailers Home Depot and Kohl’s also fuelled worries about US consumer spending, which has so far been extremely robust, in contrast to manufacturing.

On currencies, the dollar nudged lower versus the yen to 108.4 JPY= but firmed 0.13% versus a basket of currencies .DXY. Gold rose 0.4% XAU=.