Asian shares flirt with 9-month low on mounting trade war fears

Asian stocks slumped to nine-month lows on Thursday as investors worried that the the Trump administration’s approach to trade is harming global economic growth – even as the White House approach to Chinese investment in US technology companies appeared to be softening.

US oil prices hit a 3-1/2-year high as plunging US crude stockpiles compounded supply worries in a market already uncertain about uncertain Libyan exports, a production disruption in Canada and Washington’s demands that importers stop buying Iranian crude.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell as much as 0.52% to hit a new near nine-month low, before it recovered some ground, while Japan’s Nikkei average was flat after erasing earlier losses.

The US S&P 500 lost 0.60% on Wednesday to one-month closing low.

MSCI’s broadest gauge of the world’s stock markets fell to its lowest level in almost three months, on course to post its fourth losing month in the last five. Its emerging market index hit its weakest level since mid-August.

In China, shares steadied after initial falls but remained fragile after taking a battering from worries about a wobbly yuan and the trade dispute with the United States, which has investors braced for a rocky second half of the year.

“Chinese stocks have already slid into bear market territory. I have a suspicion that investors are not worrying just about a trade war but are readying for the end of technology-led bull market,” said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management in Tokyo.

“Although it is yet to be seen whether it’s caused by short-term concerns over global trade, not many investors are in the mood to buy stocks today.”

The Shanghai Composite index hit a fresh 25-month month low, with both the Shanghai and tech-heavy Shenzhen exchanges falling into bear market territory, although it was last up 0.21%.

South Korea’s tech-heavy KOSPI slipped as much as 0.97% to hit its lowest in nearly 10 months.

Trump said on Wednesday he would use a strengthened national security review process to thwart Chinese acquisition of sensitive American technologies, a softer approach than imposing China-specific investment restrictions.

Although that lifted US stocks initially, optimism quickly evaporated after White House economic adviser Larry Kudlow said Trump’s remarks did not indicate a softened stance on China.

Markets remain anxious about Trump’s hard-line approach to trade relations, with early signs his stance may not only be backfiring on him but also hurting the global economy.

Two US major auto trade groups on Wednesday warned the administration that imposing tariffs of up to 25% on imported vehicles would cost hundreds of thousands of auto jobs, dramatically hike prices on vehicles, and threaten industry spending on self-driving cars.

The move came after US motorcycle maker Harley-Davidson Inc said earlier this week it would move production intended for for European markets outside the United States to avoid retaliatory tariffs.

“Initially investors saw Trump’s moves as negotiation tactics to get better deals. But now they are starting to worry about the damage to the economy,” said Mutsumi Kagawa, chief global strategist at Rakuten Securities.

“People have long thought the US economy will eventually hit a recession at some point. But there are growing worries Trump’s trade policies may hasten that. The fear now is that ‘America First’ may become ‘America Worst’,” he added.

The yield on 10-year US Treasuries dropped to 2.827%, nearing its May 29 low of 2.759% as bond prices.

In worrying sign for some investors, the US yield curve flattened further, with the spread between the two and 10 year yields shrinking to a 10-year low of just 32 basis points, or 0.32%age point.

Historically, the US economy has tended to enter a recession after the spread had shrunk below zero%, inverting the yield curve.

The fall in US bonds yields came despite inflationary pressure stemming from rising oil prices.

US crude futures surged 3.16% on Wednesday, rising as high as $73.06 a barrel, the highest since Nov. 28, 2014, on signs of tight supply.

US crude stocks fell nearly 10 million barrels last week while the fall in Canadian exports helped drain supplies of heavy crude across North America.

White House pressure on other countries to stop all imports of Iranian oil is seen as creating an oil a shortage while a power struggle in Libya has left it unclear whether the internationally recognised government or rebels will handle oil exports.

US crude futures last traded at $72.51 a barrel, down 0.33% in Asian trade.

Copper, seen as a barometer of the strength of global economy because of its wide industrial use, hit a near three-month low of $6 692.5 a tonne.

In the currency market, major currencies were treading water on uncertainties over escalating trade friction.

The euro was hit by concerns about political uncertainty in Germany although Chancellor Angela Merkel’s coalition partner said it was not seeking to break up the government.

The common currency stood at $1.1565, edging near an 11-month low of $1.1508 set a week ago.

The dollar changed hands at 110.32 yen, up slightly but well within its narrow trading range over the past month. The currency is on course to post its smallest monthly range in nearly four years this month.

The yuan hit a six-month low as China set the yuan mid-point at its weakest since December 20 2017.