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Asian stocks drop, yuan slides as trade war escalates

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[SYDNEY] Stocks in Asia fell with US equity futures, while the yen and Treasuries climbed, after trade talks ended without a resolution and China said the US must remove all extra tariffs. The yuan retreated.

The heightened tensions over the weekend unwound gains in risk assets from late Friday as optimism over progress between the two sides faded. Shares in Japan and South Korea opened lower and S&P 500 Index futures dropped 1.1 per cent. Moves in currencies extended early Monday and Treasury yields retreated as trading began. Hong Kong is closed Monday for a holiday.

"At the moment the market is being relatively sanguine on this breakdown in negotiations," Eleanor Creagh, Sydney-based Australia market strategist at Saxo Capital Markets, said on Bloomberg TV.

"This market has almost been bullet proof and that's probably 90 per cent of the fact that central banks this year have switched into this dovish pivot. That's allowed the market to continue higher whatever the weather. With the breakdown of these trade negotiations people will have to sit back and think how far this dovish central bank stance can really continue to carry us."

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Traders are on tenterhooks, digesting a slew of details from the weekend that are seeing investors favor safer-haven assets and could mean more volatility as the week progresses. Stocks in China were especially hard-hit last week as the US increased levies on about US$200 billion worth of Chinese goods, though state funds buying equities to ease the turmoil helped push shares in Shanghai up more than 3 per cent.

Mr Trump weighed in further on the state of trade negotiations with China, saying the US was "right where we want to be" and on the cusp of taking in massive tariffs from China. He said on Saturday it would be wise for China to "act now" to complete a trade deal with the US.

Larry Kudlow, Mr Trump's top economic adviser, told Fox News that China invited trade representative Robert Lighthizer and Treasury Secretary Steven Mnuchin back to Beijing, though no date has been set. He also said Mr Trump would meet with Chinese President Xi Jinping during the G20 meeting in late June.

China said the US should take full responsibility for the setbacks because it raised tariffs on the country's products, according to an article published Monday in the People's Daily, the flagship newspaper of China's Communist Party, according to state television.

Stocks

Japan's Topix index dropped 0.7 per cent as of 9.05am in Tokyo. South Korea's Kospi index lost 0.9 per cent.

Australia's S&P/ASX 200 Index declined 0.4 per cent.

Futures on the S&P 500 Index fell 1.1 per cent. The underlying gauge rose 0.4 per cent Friday.

Currencies

The yen rose 0.3 per cent to 109.61 per US dollar.

The offshore yuan slid 0.4 per cent to 6.8744 per US dollar.

The euro bought US$1.1236, little changed.

The Aussie lost 0.3 per cent to 69.81 US cents.

Bonds

The yield on 10-year Treasuries dropped four basis points to 2.43 per cent. Australia's 10-year bond yields fell three basis points to 1.7 per cent.

Commodities

West Texas Intermediate fell 0.6 per cent to US$61.27 a barrel.

Gold gained 0.1 per cent to US$1,287.80 an ounce.

BLOOMBERG