Chinese stocks extend rout amid the prospect of a full-blown trade war

Shanghai — China’s stock markets slumped on Wednesday, extending a rout from the previous day as the prospect of a full-blown China-US trade war put a dampener on the rest of Asian equities, even as they managed a modest bounce.

MSCI’s broadest index of Asia-Pacific shares outside Japan, rose 0.4%, although that came after a 2.1% fall on Tuesday. Japan’s Nikkei was up 0.1% after earlier falling into negative territory. South Korea’s Kospi rose 1%. In China, the Shanghai Composite index dropped 0.6% in choppy trade, a day after falling 3.8% to a two-year low. Wednesday’s fall came despite 30 listed firms announcing share purchase plans by major shareholders, and state media expressing confidence in the country’s stock markets.

China’s blue-chip CSI300 index was 0.5% lower after briefly flirting with gains, and the Shenzhen Composite index was flat at midday.

The extended sell-off in China comes despite indications that the country’s central bank could move to cut banks’ reserve requirement ratios (RRR) to boost market liquidity, highlighting the concern over trade. The People’s Bank of China recommended the move in working paper on Tuesday.

“It is fair to say an RRR [cut] seems imminent … the only question is the magnitude,” Sue Trinh, head of Asia forex strategy at RBC Capital Markets in Hong Kong said in a note.

“An apparent bias towards looser policy “runs counter to the regional bias towards higher rates to protect currency downside,” she said.

Growing policy divergence indicated room for the onshore and offshore yuan to depreciate, she said.

Trade tension between the US and China showed few signs of easing after a White House trade adviser said on Tuesday that Beijing had underestimated the US president’s resolve to impose more tariffs.

Washington threatened on Monday to impose a 10% tariff on $200bn of Chinese goods after Beijing decided to raise tariffs on $50bn in US goods, in response to similar tariffs on Chinese goods announced Friday.

Weakening appetite for risk pushed the yield on benchmark 10-year treasury notes lower to 2.8894%, after earlier rising to 2.9%. The two-year yield, which rises with traders’ expectations of higher Fed fund rates, was at 2.5451% after earlier touching 2.5530%. S&P 500 futures were flat, suggesting a limited upside for Wall Street after major US indices closed lower Tuesday.

Australian catch-up rally

In contrast, Australian stocks gained 0.8%, supported by a weak local dollar, which rose 0.2% after hitting a one-year low on Tuesday.

A more attractive dividend proposition and a weaker Australian dollar have made the market more alluring to overseas investors, said Ryan Felsman, a senior economist at CommSec.

“Last year the Aussie market was only up 7% relative to the US at 25%. We didn’t get the sugar hit from the corporate tax plan, so there’s a bit of catch-up in play as well,” he said.

The US dollar was mostly flat against the yen, rising 0.05% against to ¥110.10, still some distance from its high this year of ¥113.38 on January 8.

The euro was down a hair at $1.1581, while the dollar index, which tracks the greenback against a basket of six major rivals, was barely lower at 95.040.

US crude rose 0.4% to $65.31 a barrel. But ANZ analysts said in a note that rising trade tension and disagreement within oil cartel Opec, which meets on Friday, were likely to weigh on oil prices.

Iran said on Tuesday that Opec was unlikely to reach a deal on oil output this week.

Gold was mostly flat after falling near six-month lows Tuesday on a strong dollar. Spot gold was traded at $1274.50/oz.

Investors in cryptocurrencies were also hit by losses after South Korean virtual currency exchange Bithumb said it had been hacked and 35-billion won worth of virtual currency held at the exchange was stolen.

Bitcoin was 1.8% lower at $6,615.46.

Reuters