Stocks Tumble, Treasuries Surge as the Yuan Hits 7: Markets Wrap

(Bloomberg) -- European stocks slumped with U.S. equity futures on Monday, tracking a sell-off across Asia after China escalated its trade dispute with America as its currency weakened through a milestone level. Treasuries led a global bond rally as investors dashed to safer assets.

Declines in mining, industrial goods and tech shares led the Stoxx Europe 600 lower, while S&P 500 Index futures slumped as much as 1.4%. China’s yuan weakened beyond 7 per dollar, a move that suggests the level is no longer a line in the sand for policy makers in Beijing. Equities took another leg down after Bloomberg reported the Asian nation has asked state purchasers to halt imports of American agricultural products. Hong Kong shares were hit hardest amid swelling unrest in the city streets.

Havens were in demand. Gold rallied and 10-year Treasury yields dropped to their lowest since October 2016. European bonds advanced as data showed economic activity in the euro area’s private sector weakened further. The yield on 10-year U.K. gilts fell to a record low.

“The market needs a circuit-breaker,” such as a more aggressive Federal Reserve or a resumption of U.S.-China talks, Jonathan Cavenagh, head of foreign-exchange strategy for emerging markets Asia at JPMorgan Chase (NYSE:JPM) & Co. in Singapore, said on Bloomberg Television. “If you see enough U.S. equity-market weakness, if you see enough downward momentum in economic data, then both sides may come back to the negotiating table at some stage. But I don’t think that’s going to happen at least in the near term.”

After a dramatic session in Asia, all focus will now be on whether President Donald Trump responds to the Monday news about China’s exchange-rate. In the past he has criticized the Asian nation for allegedly manipulating the yuan for competitive export advantage. Wall Street has also speculated about the potential for the Trump administration to intervene to cap dollar gains, though White House economic adviser Larry Kudlow on Friday ruled that out.

The yuan’s drop was the biggest since August 2015, when officials announced a surprise devaluation that roiled global markets. The People’s Bank of China said that it is able to keep the currency stable and at a reasonable level, and that broke above 7 per dollar because of trade protectionism.

Elsewhere, West Texas oil dropped below $55 a barrel amid the escalation in trade tensions. Other commodities came under renewed pressure, with iron ore futures in Singapore plunging the most in more than two years, to below $100 a ton.

These are some key events to watch out for this week:

• Earnings from financial giants include: UniCredit, AIG (NYSE:AIG), ABN Amro Bank, Standard Bank, Japan Post Bank.
• Five Asian central banks have rate decisions including India, Australia and New Zealand.
• A string of Fed policy makers speak this week. Governor Lael Brainard is up first on Monday, followed by St. Louis chief James Bullard on Tuesday and Chicago’s Charles Evans a day later. All are Federal Open Market Committee voters.

Here are the main moves in markets (all sizes and scopes are on a closing basis):

Stocks

• The Stoxx Europe 600 Index decreased 2.1% as of 9:30 a.m. London time.
• Futures on the S&P 500 Index declined 1.3%, the biggest drop in more than two months.
• The MSCI Asia Pacific Index sank 2%, the largest tumble in more than nine months.
• Hong Kong’s Hang Seng Index decreased 2.9%, the biggest dip in three months.
• The MSCI Emerging Market Index dipped 2.1%, its ninth consecutive decline.

Currencies

• The Bloomberg Dollar Spot Index gained 0.1%.
• The British pound decreased 0.3% to $1.2123.
• The euro advanced 0.3% to $1.1139, the biggest gain in more than two weeks.
• The onshore yuan sank 1.3% to 7.0352.

Bonds

• The yield on 10-year Treasuries declined nine basis points to 1.75% with its seventh straight decline.
• The yield on two-year Treasuries fell 10 basis points to 1.61%.
• Japan’s 10-year yield decreased three basis points to -0.191%.
• Germany’s 10-year yield dipped two basis points to -0.52%.

Commodities

• Gold gained 1.2%, the highest in more than six years.
• West Texas Intermediate crude fell 1.6% to $54.78 a barrel.
• Iron ore sank 7% to $95.89 per metric ton, in the biggest tumble in more than two years.