U.S. stock futures fell and Asian shares slipped on growing uncertainty over whether the United States and China will be able to reach a deal to end their escalating trade war. The United States and China appeared at a deadlock over trade negotiations on Sunday as Washington demanded promises of concrete changes to Chinese law and Beijing said it would not swallow any “bitter fruit” that harmed its interests.
E-Mini futures for the S&P 500 shed 1.0%. MSCI`s broadest index of Asia-Pacific shares outside Japan dropped 0.4%, nearing its two-month low marked on Thursday. Chinese shares tumbled, with the benchmark Shanghai Composite and the blue-chip CSI 300 shedding 1.4% and 1.6%, respectively, while Hong Kong`s financial markets were closed for a holiday.
Japan`s Nikkei average sunk as much as 1.0% to hit its lowest level since March 28. It last traded down 0.5%. U.S. benchmark 10-year Treasury note yield inched down to 2.441%, partly as a safe haven but also on speculation that the escalating trade war would put more pressure on global growth and thus keep major central banks accommodative. President Donald Trump tweeted late on Sunday that the United States is “right where we want to be with China,” adding that Beijing “broke the deal with us” and then sought to renegotiate.
The trade war between the world`s top two economies escalated on Friday, with the United States hiking tariffs on $200 billion worth of Chinese goods after Trump said Beijing “broke the deal” by reneging on earlier commitments. China has vowed to retaliate, without giving details. White House economic adviser Larry Kudlow told a Fox News program that China needs to agree to “very strong” enforcement provisions for an eventual deal and said the sticking point was Beijing`s reluctance to put into law changes that had been agreed upon. Kudlow said the U.S. tariffs would remain in place while negotiations continue.
“Talks are on-going, but our base case is for limited progress and Chinese retaliation. We see a significant risk for all Chinese imports to be subject to tariffs over the next month or so,” said Michael Hanson, head of global macro strategy at TD Securities. “The market reaction will ultimately depend on whether China and the U.S. continue to negotiate, whether the remaining $325 billion of U.S. imports from China also get tariffed, how China retaliates, and what happens to the (section) 232 auto tariffs.”
Under that scenario, the renminbi was likely to fall between 5%-6% against the U.S. dollar in the coming three months, said Hanson, as a shock absorber to the economic impact of heavier tariffs. The offshore Chinese yuan fell to its lowest levels in more than four months at 6.88 to the dollar. It last stood down 0.4% at 6.872 per dollar.