Trade woes sink shares, Brexit weighs on sterling

[May 23, 2019]  By Marc Jones

LONDON (Reuters) - World shares made it four days in the red in the last five on Thursday as concerns grew that the China-U.S. trade conflict was fast turning into a technology cold war between the world's two largest economies.

Asian stocks caved to a four-month low as the rhetoric between Beijing and Washington remained fierce while Europe's bourses also fell as Brexit worries and gloomy data from Germany and the euro zone added to the nerves.

U.S. stock futures also pointed to a weak start with the S&P 500 e-minis faltering 0.5%.

Investors worry that the U.S.-China trade dispute, which has already hurt global growth and business investment, could see a further sharp escalation with no signs of a resolution as yet.

Late Wednesday, Reuters reported the U.S. administration was considering Huawei-like sanctions on Chinese video surveillance firm Hikvision over the country's treatment of its Uighur Muslim minority, according to a person briefed on the matter.

After the United States placed Huawei Technologies on a trade blacklist last week, British chip designer ARM has halted relations with Huawei in order to comply with the blockade.

Digging the knife in, the U.S. military said it sent two Navy ships through the Taiwan Strait on Wednesday.

"It's tin hats on and battening down the hatches for a fair bit of volatility for the next few months," said Tony Cousins, Chief Executive of Pyrford International, the global equities arm of BMO Global Asset Management.

"We are as defensively positioned as we could be," he said, adding it was impossible to predict what steps U.S. President Donald Trump was likely to take next in the trade war with China.

An increasing number of investors now seem to be hunkering down for prolonged period of trade conflict.

Analysts at Nomura warned in a note, "Without a clear way forward during an intensifying 2020 U.S. presidential election, we see a rising risk that tariffs will remain in effect through end 2020."

In response, Shanghai blue chips shed 1.7% to be near their lowest since February. An index of major telecoms firms fell 3.7% as suppliers to Huawei suffered. MSCI's broadest index of Asia-Pacific shares outside Japan touched its lowest in four months.

Treasury Secretary Steven Mnuchin said on Wednesday it would be at least a month before the United States would enact proposed tariffs on $300 billion in Chinese imports as it studies the impact on American consumers.

The Indian market bucked the global picture Prime Minister Narendra Modi's party scored a historic victory in the nation's general election with official data showing Modi's Bharatiya Janata Party (BJP) ahead in 292 of the 542 seats available.

At least 272 seats are needed for a majority in the lower house of parliament.

The London Stock Exchange Group offices are seen in the City of London, Britain, December 29, 2017. REUTERS/Toby Melville

ENDLESS BREXIT

In currencies, constant trade friction saw the safe haven yen in demand again as the dollar dipped to 110.16 yen and away from the week's top of 110.67.

The dollar was up fractionally on the euro at $1.1130 and touched a 1-month high on a basket of currencies at 98.235.

Minutes of the U.S. Federal Reserve's last meeting out on Wednesday underlined its readiness to be patient on policy "for some time" given the uncertain global outlook.

The chance of a rate cut seemed to diminish as many Fed policy makers saw recent weakness in inflation as "transitory", though the latest escalation in the trade war means markets are still wagering on an eventual easing.

Sterling had troubles of its own as it hit a 4-1/2-month low of $1.2603 as it suffered its ninth drop in the last 10 days.

British Prime Minister Theresa May came under intense pressure after her latest Brexit gambit backfired and fueled calls for her to quit.

Prominent Brexit supporter Andrea Leadsom resigned from the government on Wednesday and with British media reporting May could announce her departure date as early as Friday the bets on a more hard Brexit replacement are rising.

"Uncertainty is the only clear certainty in the near term," said Westpac macro strategist Tim Riddell.

"The risk of a hard-Brexit replacement for May has increased the risks of a hard Brexit result or even a forced no-deal exit," he added. "Such an event would likely force GBP lower, increase risks of assets sliding and BOE (Bank of England) taking counter action to support assets."

In commodity markets, spot gold was a bit higher at $1,274.73 per ounce.

Oil prices added to losses suffered overnight after an unexpected build in U.S. crude inventories compounded investor worries about demand.

U.S. crude was last down 48 cents at $60.94 a barrel, while Brent crude futures lost 57 cents to $70.41.

(Additional reporting by Wayne Cole in Sydney; Editing by Raissa Kasolowsky)

[© 2019 Thomson Reuters. All rights reserved.]

Copyright 2019 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.  Thompson Reuters is solely responsible for this content.