Asia: Shares sink, bonds surge as trade fears mount

[SYDNEY] Asian shares were a sea of red on Monday as the latest salvo in the Sino-US trade war shook confidence in the world economy and sent investors steaming to the safe harbours of sovereign bonds, gold and the Japanese yen.

Yields on benchmark 10-year Treasury debt dropped to their lowest since mid-2016, while gold hit its highest since April 2013 as risk was shunned.

The Chinese yuan also came under pressure, with the dollar quoted up at 7.1710, and markets braced for more intervention from Beijing to support the currency.

MSCI's broadest index of Asia-Pacific shares outside Japan shed 0.8 per cent, and Australia 1.7 per cent.

Japan's Nikkei lost 2.3 per cent, while E-Mini futures for the S&P 500 were down 1 per cent.

Wall Street nose-dived on Friday when President Donald Trump announced a 5 per cent additional duty on US$550 billion in targeted Chinese goods, hours after China unveiled retaliatory tariffs on US$75 billion worth of US products.

At the G7 meeting in France over the weekend, Mr Trump caused some confusion by indicating he may have had second thoughts on the tariffs.

But the White House said on Sunday that Mr Trump wished he had raised tariffs on Chinese goods even higher last week, even as he signalled he did not plan to follow through with a demand that US firms close operations in China.

Mr Trump is now set to hold a joint news conference with French President Emmanuel Macron later on Monday.

"There is an uneasy feeling that the very fragile negotiations are spiralling out of control," wrote analysts at ANZ in a note.

"The escalation suggests uncertainty will continue to weigh on global trade, industrial production and investment, with no sign of a resolution."

The latest broadside overshadowed a pledge by Federal Reserve Chair Jerome Powell to "act as appropriate" to keep the US economy healthy, although he stopped short of committing to rapid-fire rate cuts.

The markets clearly believe, however, the Fed will have to act aggressively and are fully priced for at least a quarter-point cut in September and more than 110 basis points of easing by the end of 2020.

"Trump shows no signs of moderating his destructive trade policies," said JPMorgan analyst Adam Crisafulli.

"Central banks can't fully ameliorate the downside of a global trade war," he added. "Companies will enter lockdown mode in terms of spending, and eventually hiring, until at least the November 2020 election amid all the uncertainty."

Yield inversion

Yields on 10-year Treasury notes were down at 1.476 per cent, having dived from a top of 1.66 per cent on Friday, leaving them almost matching two-year yields.

"We continue to remain long 10's, targeting 1.3 per cent due to a combination of weakness in the global economy and trade war uncertainty filtering through into a weaker US economy," said Priya Misra, head of global rates strategy at TD Securities.

"This will force the Fed to ease beyond a 'mid-cycle adjustment to policy'," he added. "We believe that the market is underpricing the risks of additional rate cuts in 2020."

The drop in yields initially swept the legs out from under the dollar, which slid 0.5 per cent on Friday against a basket of currencies and was last trading at 97.654.

It took a hit on the yen, considered a safe haven thanks to Japan's position as the world's largest creditor nation, and was last down 0.3 per cent at 105.04, having shed 1 per cent on Friday.

The next major chart point is a low around 104.10 briefly touched during the "flash-crash" of early January.

The euro was firm at US$1.1145, having climbed 0.6 per cent on Friday, although restrained somewhat by speculation the European Central Bank will also have to ease aggressively next month.

The US dollar fared better elsewhere, making inroads on most emerging market currencies. The Turkish lira briefly tumbled as far as 6.4700 per US dollar at one stage.

Spot gold got a boost from the slide in yields, rising 1.2 per cent to US$1,544.83 per ounce and touching its highest since April 2013.

Oil prices went the other way on worries the tariffs dispute would crimp world demand.

Brent crude futures slid 87 cents to US$58.47, while US crude lost US$1.02 to US$53.15 a barrel.

REUTERS