Bond yields and world stocks fall on renewed US-China trade-war fears

London — Fears of an escalating trade dispute between the US and China spread from Asian markets to Europe on Thursday, triggering a fall in bonds yields and stocks, particularly among exporters.

Germany’s blue-chip index DAX 30, which is seen as a trade-war proxy, fell 1.1% about an hour after the open while the broader pan-European STOXX 600 was down about 0.5%. Eurozone government bond yields edged down with borrowing costs in Germany and France pulling back from seven-week highs as demand for safe-haven debt grew after the US administration increased pressure on China by proposing a higher 25% tariff on $200bn worth of Chinese imports.

MSCI’s broadest index of Asia-Pacific shares outside Japan closed 1.6% down, dragged down by a 1.8% fall in Chinese H-shares.

Analysts blame the current retreat in world stock markets on the uncertainty around the trade policy of the Trump administration, while recent corporate results are seen as encouraging.

“One needs to have a strong gut feeling to invest in this environment and, in August, I doubt many people will have one” said Hervé Goulletquer, deputy head of research at France’s La Banque Postale Asset Management in Paris. He added that investors badly need a “framework of interpretation” to read through the trade statements of the Trump administration and the poor visibility on that front was holding markets back.

The pound was slightly down at $1.3086 ahead of an expected rate hike by the Bank of England (BOE) later in the day. While a rate hike is widely expected and mostly priced in, analysts warned clients not to be complacent as the market reaction would probably be tough to read.

“While a failure to act would, in all likelihood, trigger a sharp sell-off in the pound, given the rate rise is already priced in,” said Michael Hewson of CMC Markets, “we could well see some sterling weakness in any case if the bank is overly dovish in its guidance.”

The US Federal Reserve kept interest rates unchanged on Wednesday, as expected, characterising the US economy as strong and staying on track to increase borrowing costs in September and likely again in December.

Oil prices steadied after losses over the past two days from a surprise increase in US crude inventories and renewed concerns over trade friction between the US and China. Brent crude futures were up flat at $72.39 a barrel by 8.54am GMT, after dropping 2.5% on Wednesday.

Reuters