Global stocks stumbled and the renminbi retreated after an escalation in diplomatic friction between the US and China and a darker assessment on Covid-19 from President Donald Trump.
The Stoxx Europe 600 index fell under 1 per cent, placing the region-wide benchmark on course to end a three-session winning streak. The dollar pushed above 7 against the Chinese currency after the US asked Beijing to shut its consulate in Houston and local media reports showed what appeared to be consulate staff burning documents. The renminbi later trimmed those gains to break back below 7 to a dollar.
Beijing immediately condemned the move and warned it would retaliate unless the US rethought its decision.
US stock futures reflected the more cautious tone, with the S&P 500 futures pointing to Wall Street opening lower.
“This is an escalation of degree rather than of kind,” said Tom Holland from Gavekal in Hong Kong. “Senior US administration officials have been getting increasingly more open and active in their criticisms of China.”
This week’s visit to London by Mike Pompeo, the US secretary of state, was among a number of factors that appeared to be aimed at marshalling support for the US stance against Beijing, Mr Holland added.
“So you would think investors would already have priced in the further steep deterioration in US-China relations, which has clearly been on the cards for a while now.”
“It is clear that tensions between the two countries are rising,” added Monica Defend, Amundi’s global head of research. “China’s approach is expected to remain one of tit-for-tat, with emerging speculation that China will close the US consulate in Wuhan.”
The latest escalation in US-China tension came after Mr Trump said on Tuesday that the tally of cases in the US would “get worse before it gets better”, a comment taken as an acceptance on his part of the severity of the pandemic that he previously said would “just disappear”.
The US reported more than 1,000 daily coronavirus deaths for the first time since May, while the number of new daily cases ticked back above 60,000. California became the second state to surpass 400,000 infections, after New York, while caseloads in other sunbelt states have pushed higher in recent weeks.
Japan’s Topix index slipped 0.6 per cent on Wednesday, while Australia’s S&P/ASX 200 fell 1.1 per cent. Hong Kong’s Hang Seng was off 2.3 per cent.
None of this has yet to put an end to the rally in US corporate bonds, however, with the yield on higher-rated investment-grade sinking to 1.99 per cent on Tuesday, according to an index run by Ice Data Services. This marks the first time the index has fallen below 2 per cent, as debt markets remain supported by the Federal Reserve, helping borrowing costs to decline.
Uncertainty over the trajectory of the health crisis fuelled demand for some haven assets. Gold jumped 0.7 per cent to a nine-year high of $1,854.80 an ounce. US government bonds held firm, with the yield on US 10-year Treasuries down slightly at 0.59 per cent.
Oil prices fell. West Texas Intermediate, the US marker, slipped 1.5 per cent to $41.28 a barrel. Brent, the international benchmark, fell 1.3 per cent to $43.74 a barrel.
Additional reporting by Joe Rennison and Naomi Rovnick