Asian equities took a beating Friday on rising China-US tensions while a worse-than-forecast US jobs report and stalled stimulus talks in Washington fuelled fears about the economic recovery.
The losses come at the end of another tough week for markets, which have shown signs of stuttering after a months-long rally from their March trough.
Shanghai and Hong Kong led the sell-off Friday as relations between the world’s two superpowers took another bad turn when China ordered the closure of the US consulate in Chengdu in retaliation for America shuttering Beijing’s diplomatic mission in Houston this week.
The standoff is the latest in a string of issues — including Hong Kong, coronavirus and Huawei — that have plunged relations between the superpowers into crisis.
On Thursday, Secretary of State Mike Pompeo ramped up his rhetoric, calling on “free nations” to triumph over the threat of what he said was a “new tyranny” from China, while and said President Xi Jinping was a “true believer” in the “bankrupt” totalitarian Marxist-Leninist ideology.
But, while the move spooked investors, former Chinese diplomat Wang Yiwei said it was not as bad as it could have been.
“It’s not possible to carry out an entirely equivalent action, but choosing Chengdu shows China wants to reduce the harm made to bilateral relations,” he told Bloomberg News. “The operations out of Chengdu are not the most high-profile of the US mission in China, compared to say Shanghai.”
Markets were already in the red following a steep drop on Wall Street sparked by news that 1.4 million Americans applied for jobless benefits last week, the first week-on-week rise since the start of the crisis.
The figures came as several states around the country were forced to reimpose containment measures soon after reopening from lockdown, forcing some to close bars, restaurants and other businesses key to the economy.
The reversion to such measures has come as a big blow to investors who had grown optimistic that the US economy was rebounding sharply from the collapse seen earlier in the year.
“Despite the data holding to season norms, it is difficult for investors to look through the discordant sense of permanency that is getting displayed in the absolute number of folks claiming benefits,” said Stephen Innes of AxiCorp.
“But it also confirms what we all thought, (which) is that more gloom is building on the horizon as the reintroduction of lockdown measures in the most populous US states is walking back the thesis that the economy was rebounding sharply.”
The Dow and S&P 500 both lost more than one percent and the Nasdaq, which has been hitting regular records of late, dropped more than two percent.
And Asia took up the baton, with Hong Kong tumbling 2.2 percent and Shanghai losing 3.9 percent, while Sydney, Singapore, Jakarta and Bangkok retreated more than one percent.
Mumbai eased 0.6 percent and Seoul was 0.7 percent off, while there were also losses in Taipei, Manila and Wellington.
London dived 1.7 percent, while Paris and Frankfurt were around two percent down despite data showing, UK retail sales soared 14 percent in June and eurozone business activity growth was the strongest in two years.
Economists suggested the weak data could spur US lawmakers to push on with fresh stimulus measures as their previous multi-trillion-dollar package comes to an end soon.
But Republicans and the White House have been unable to reach an agreement on their $1 trillion proposal, with the two still at odds over the $600 weekly unemployment benefits, which are drawn by 30 million people but run out this weekend.
Even once that is passed, they must then haggle with Democrats, who have already prepared their own $3.5-trillion plan, all the while with the August recess approaching.
“Why on Earth the passing of this new US stimulus bill has devolved into a case of political gerrymandering when economic calamity is knocking at the door, is beyond comprehension,” Innes added.
“Congress is considering extending additional unemployment benefits until the end of the year, but cutting the amount when they should be adding more to the punch bowl is obscene.”
Gold — a go-to asset in times of turmoil — continued its march higher, coming within spitting distance of $1,900 for the first time since late 2011, boosted by uncertainty over the economic recovery, geopolitical tensions and Federal Reserve monetary easing that has weakened the dollar.
Hong Kong – Hang Seng: DOWN 2.2 percent at 24,705.33 (close)
Shanghai – Composite: DOWN 3.9 percent at 3,196.77 (close)
London – FTSE 100: DOWN 1.7 percent at 6,104.11
Tokyo – Nikkei 225: Closed for a holiday
Euro/dollar: UP at $1.1608 from $1.1594 at 2050 GMT
Dollar/yen: DOWN at 106.37 yen from 106.86 yen
Pound/dollar: UP at $1.2737 from $1.2736
Euro/pound: UP at 91.13 pence from 91.00 pence
West Texas Intermediate: FLAT at $41.07 per barrel
Brent North Sea crude: UP 0.1 percent at $43.36 per barrel
New York – Dow: DOWN 1.3 percent at 26,652.33 (close)