Huawei sanctions send world stocks into tailspin

London — European stocks fell, US government bond yields slipped and the yen firmed on Thursday after the US government hit Chinese telecoms giant Huawei with severe sanctions, further straining China-US trade ties.

An index of European shares fell as much as 0.5% in early European trading with the German stock index down 0.4%. US stock futures were down 0.4%, pointing to a weak start on Wall Street.

The broad weakness in European markets was somewhat offset by small gains in Chinese and Hong Kong stock indices leading to only marginal losses on a global stock index as investors expected state authorities to step in to support the market and stabilise sentiment.

“Chinese stocks are up as markets expect authorities to intervene to support sentiment, but this kind of activity is not sustainable and unless we see a clear resolution in the China-US trade conflict, overall sentiment will remain weak,” said Neil Mellor, a senior forex strategist at BNY Mellon in London.

While benchmark indices in China and Hong Kong were up between 0.3% and 0.8% at the close of trading, bond markets were signaling more pain for risk appetite.

Core German government bond yields were flirting with their lowest level in nearly three years while Dutch bond yields were about to dip into negative territory, a phenomenon not seen since October 2016.

Late on Wednesday, the US commerce department said it was adding Huawei Technologies and 70 affiliates to its “entity list” — a move that bans the company from acquiring components and technology from US firms without government approval.

The move took global markets by surprise as sentiment had steadied somewhat in the previous session on news that US President Donald Trump was planning to delay tariffs on automotive imports after a swathe of weak US and Chinese economic data.

Rate cut bets grow

As trade tensions have made a reappearance on investors’ radars, weak US data has also ratcheted up market expectations of a US interest rate cut in the coming months.

In the US, retail sales unexpectedly fell in April as households cut back on purchases of motor vehicles and a range of other goods, while industrial production fell 0.5% in April, the third drop this year.

Yields on 10-year US treasury bonds eased to 2.366% , near a 15-month low of 2.340% touched on March 28.

Fed funds rate futures are fully pricing in a rate cut by the end of this year and more than a 50% chance of a move by September.

“The markets are edging step-by-step in pricing in a rate cut. That is a sea change from a year ago when the consensus was three to four rate hikes a year,” said Akira Takei, bond fund manager at Asset Management One.

Falling US yields have eroded support for the dollar with it down 0.1% against a basket of its rivals .

Oil prices gained on the prospect of mounting tensions in the Middle East hitting global supplies despite an unexpected build in US crude inventories. Brent crude rose 0.3% to $71.99 a barrel, while US West Texas Intermediate (WTI) crude fetched $62.26, also 0.5% higher.

Gold edged up to $1,296.9 an ounce.

Reuters