Wall Street bounces back as Chinese stocks sink further

Stocks on Wall Street recovered some of Monday’s losses as investors took a fresh look at the implications of the US-China trade war.

The Chinese sharemarket appears to be one loser, with its main stock index slipping into a bear market, having lost 20.1% from a two-year high on January 24.

Europe, too, could be a victim as the export-sensitive auto sector of its broad stock benchmark has dropped 11% over the past month and is within 1% of a bear market.

In Washington, the administration appeared split over the next phase of the trade war – limits on Chinese investment in high-tech US companies, backed up by a ban on exports associated with futuristic technology products.

Treasury Secretary Steve Mnuchin insisted the moves, to be announced on June 30, were not specifically aimed at China, while trade adviser Peter Navarro said they were and assured investors other countries weren’t affected.

Further details of the plan, reported at the weekend, triggered Monday’s selloff of tech stocks, sending the Nasdaq Composite down more than 2%.

However, it recovered to close up 0.4% at 7561.63 on Tuesday. The Dow Jones Industrial Average closed up 30.31 points, or 0.1%, at 24, 283.11, having lost 1.3% on Monday and rising nearly 100 points earlier in the session.

The S&P 500 added 0.2% to 2723.06.

GE jumps 8.5% on demerger plan
In a major move, General Electric climbed 8.5% – its largest percentage increase in more than three years – after announcing it would sell oil-services firm Baker Hughes and spin off its healthcare unit.

This would leave the company, which is to drop out of the blue-chip Dow 30 industrials after being a member since its inception, with a focus on power generation and aviation.

In Asia, the Shanghai Composite Index closed down 0.5% at a fresh two-year low.

“The trade conflict between the US and China has turned out to be more protracted and fiercer than we had expected,” says Victoria Mio, Hong Kong-based chief investment officer for China at Robeco, a Dutch asset-management firm.

“The weakening of the economy has also surpassed market expectations, and the Chinese central bank probably needs to do more to alter such expectations.”

Data for May showed a slowdown in areas ranging from investment to retail sales. The Chinese yuan also hit a new low against the US dollar after the China’s central bank said it would reduce the amount of cash it required banks to hold in reserve in an attempt to boost lending.

China’s bear market compares with the S&P 500 rising slightly for the year, while both the MSCI All-Country Asia Pacific and Stoxx Europe 600 are down about 3%.

Selloff in euro markets
European markets have been heavily hit by their exposure to international trade. In recent weeks, investors have withdrawn billions of dollars from European equity and bond funds.

Goods and services exports make up 27% of the eurozone’s economy, compared with 12% for the US and 21% for China, 

Daimler’s announcement last week that Chinese retaliatory import duties on vehicles built in the US would hit sales and profits spooked the sector, which makes up 14% of Germany’s DAX.

The European auto sector fell for seven straight sessions through Monday.

“We think that the warning from Daimler […] is a line in the sand,” Voya Investment Management head of asset allocation Barbara Reinhard says.

Initial trade tensions are more focused on narrow corners of the US market but cars are much more global in nature and will likely hit Europe harder, she adds.

Shares of Volkswagen and BMW have each lost 8.7% in the past month, while Italian-American Fiat Chrysler Automobiles, which generates 53% of its revenues in the US, has fallen 15%.

On Monday, the Stoxx 600 was little changed, France’s CAC 40 eased 0.05%, Germany’s DAX fell 0.3% and the UK’s FTSE 100 rose 0.4%.

Oil prices rise
In other markets, US oil prices rose more than 3% to $US70 a barrel, after a senior State Department official said Washington expects all countries to cut oil imports from Iran to zero by November 4 or risk sanctions.

Light, sweet crude for August delivery gained 3.2% to $US70.26 a barrel while Brent oil, the global benchmark, increased 2.1% to $US76.08.

Iran exports more than two million barrels a day of oil. But President Donald Trump in May withdrew from a nuclear deal with Iran and reimposed sanctions that seek to force companies not to buy any Iranian oil.

In a further blow to Iran, where mass protests are demanding the government focus on improving its economy rather than fight wars in the Middle East, the US Supreme Court upheld a travel ban on Iran as one of six mainly Muslim countries.

US government bonds stabilised after Monday’s a volatile session, with the yield on the benchmark 10-year treasury note recently trading at 2.880% compared with 2.875%.