Asian shares flounder amid worry that trade talks will ease tension

Shanghai — Asian shares stumbled on Friday amid rising doubts that a highly anticipated meeting between US President Donald Trump and Chinese President Xi Jinping this weekend could lead to an easing of trade tensions.

Uncertainty over whether the talks will produce progress in ending the year-long trade war between the world’s two largest economies comes amid signs of rising risks to global growth.

“I’m not sure the Americans can deliver what the Chinese want and the Chinese don’t want to deliver what the Americans want,” said Greg McKenna, strategist at McKenna Macro, adding that he sees an “extend and pretend” outcome, in which Chinese and US officials agree to continue talks, as the most likely outcome of the weekend meeting.

Regardless of the outcome, McKenna said, “we will not be in a holding pattern on Monday morning”.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.3%, with weakness in Chinese equities weighing on the broader region. Japan’s Nikkei stock index was 0.55% lower.

White House economic adviser Larry Kudlow said on Thursday that Trump has agreed to no preconditions for the meeting, set to take place on Saturday at the G20 summit in Japan, and is maintaining his threat to impose new tariffs on Chinese goods.

Kudlow also dismissed a Wall Street Journal report that China was insisting on lifting sanctions on Chinese telecom equipment giant Huawei Technologies as part of a trade deal and that the Trump administration had tentatively agreed to delay new tariffs on Chinese goods.

On Thursday, China’s central bank pledged to support a slowing economy as global risks rise, ahead of the release of data that is expected to show China’s factory activity shrank for a second consecutive month in June.

Chinese blue chips fell 0.49% on Friday and Hong Kong’s Hang Seng lost 0.59%. Australian shares were off 0.3%.

The losses followed gains in global equity markets overnight. But US S&P 500 e-mini stock futures wavered on Friday, trimming early gains to trade flat.

“Central expectations for the G20 meeting between Trump and Xi are that negotiations will resume, additional US tariffs will be delayed, China will buy more US goods and talks over tech-trade will gain renewed focus,” analysts at ANZ said in a morning note.

“However, as the difficulty of resolving economic aspirations between the two countries is herculean, markets remain cautious.”

Seema Shah, global investment strategist at Principal Global Investors, said even if signs of progress emerge on trade, investors would quickly move on to US interest rate policy.

“As the equity market is now fully pricing in a 50 basis point cut, market disappointment could be significant … and if the Fed follows through with a cut despite a brighter trade outlook? Beyond the knee-jerk euphoria, expect minimal market reaction – this last scenario is exactly what the market is already expecting,” she said in a note.

On Thursday, the S&P 500 rose 0.38% and the Nasdaq Composite added 0.73%. The Dow Jones Industrial Average eased 0.04%, dragged down by losses in Boeing shares following a Reuters report that the US Federal Aviation Administration identified a new safety risk in the planemaker’s grounded 737 MAX aircraft.

Highlighting mixed market views on the outlook for the weekend’s Sino-US talks, yields on benchmark 10-year Treasury notes rose to 2.0123%, compared with a US close of 2.005% on Thursday, despite the reversal in equities.