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Global markets remained subdued on Monday after the United States and China imposed new tariffs on each other, while the spotlight returned to emerging-market risk as Argentina imposed capital controls.
Argentina’s international dollar bonds dropped to record lows, its financial stocks tumbled and risk premia shot up after president Mauricio Macri re-imposed capital controls on Sunday as the country battled to avoid its ninth sovereign default.
The about-face by Macri, who had previously lifted many protectionist practices of his predecessor, Cristina Fernandez de Kirchner, came after the government failed to stem heavy investment outflows and to shore up its tumbling currency.
MSCI’s All-Country World Index, which tracks shares across 47 countries, was down 0.04 per cent on the day.
US markets were shut for a holiday on Monday. European shares ticked higher as surprisingly positive data helped China weather the latest round of tit-for-tat tariffs between the United States and China that came into effect over the weekend.
Washington imposed 15 per cent tariffs on a variety of Chinese goods and China began to impose new duties on a $75 billion target list. However, both sides will still meet for talks later this month, US president Donald Trump said.
Trade-sensitive German shares were 0.4 per cent higher and the pan-European stocks benchmark index STOXX 600 was up 0.63 per cent by midday in London, beginning September higher. It fell 1.6 per cent in August as the trade war intensified.
‘Despite the market’s sanguine take, we believe the ultimate outlook for the trade dispute has become harder to predict with confidence,’ said Mark Haefele, chief investment officer at UBS Global Wealth Management.
‘Since trade tensions have become the major driving force for stocks, even greater than monetary policy, we advise against adding significantly to equity exposure – particularly for those who have an adequate strategic allocation.’
Income-generating carry positions such as select emerging market currencies will perform well as central banks ease policy in response to weaker growth, Haefele added.
Eurozone manufacturing activity contracted for a seventh month in August as declining demand sapped optimism, a survey showed, strengthening expectations for monetary easing by the European Central Bank next week.
At its July meeting, the ECB all but promised to ease policy as the growth outlook worsened.
Italian bond yields fell toward recent multi-year lows after Italy’s prime minister said at the weekend talks on a new government should be completed by Wednesday. The 5-Star Movement and the Democratic Party held talks over the weekend on cabinet posts and a common agenda.
In currency markets, the dollar was 0.1 per cent higher against a basket of peers.
The euro was 0.2 per cent lower at $1.09665, not far from two-year low of $1.0963 hit in US trade on Friday.
MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.24 per cent, led by 0.5 per cent drop in Hong Kong’s Hang Seng after another weekend of violent anti-government protests.
Chinese shares rose, however, with the CSI300 index gaining 1.1 per cent despite the trade row escalation. A pledge by China’s State Council to boost support for the economy helped.
Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI), a private sector survey, on Monday showed factory activity unexpectedly expanded in August, though gains were modest and contrasted with official data that pointed to further contraction.
Washington imposed tariffs on a variety of Chinese goods and while Beijing imposed new duties on US crude, the latest escalation in a bruising trade war. Studies suggest the tariffs will cost US households up to $1,000 a year.
Many market players say the market’s reaction was likely exaggerated by algorithm-driven players’ flows in thin trading at the start of Asian trade on Monday. Liquidity could be even more limited than usual because of a US holiday on Monday.
‘(The market move) goes to show you how many data mining algos are involved with equity-linked compared with forex-linked. Was anyone surprised by these tariffs that took effect yesterday?’ said Takeo Kamai, head of execution at CLSA in Tokyo.
Tension is also running high in Hong Kong. Police and protesters clashed in some of the most intense violence since unrest erupted more than three months ago.
Thousands of protesters blocked roads and public transport links to Hong Kong airport and police made several arrests after demonstrators smashed CCTV cameras and lamps and dismantled station turnstiles.
China, eager to quell the unrest before the 70th anniversary of the founding of the People’s Republic of China on October 1, has accused foreign powers, particularly the United States and Britain, of fomenting the unrest.
Oil prices fell on Monday. Brent crude futures dropped 0.15 per cent to $59.16 a barrel, US West Texas Intermediate (WTI) crude futures were flat at $55.1.
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