Stocks Drop as Trade Spat Intensifies

U.S. Treasury yields decline

Global stocks started the week with sharp declines, extending their losses from Friday after President Trumpthreatened further tariffs on Chinese imports.

The Stoxx Europe 600 was down 1.6%, led by losses in the basic resources sector, which dropped more than 3%.

In the U.S., S&P 500 futures were down 1.1%. Futures don’t necessarily predict moves after the opening bell.

Stocks across Asia fell and the Chinese yuan depreciated to a new low in offshore trading, following the escalation in the U.S.-China trade dispute and amid widespread protests in Hong Kong.

Japan’s Nikkei fell 1.7% and Korea’s Kospi dropped 2.6%, while the Chinese yuan weakened beyond the psychologically important 7-per-dollar level, falling as much as 1.9% to 7.1087 per dollar in Hong Kong in early trading.

Hong Kong’s Hang Seng Index fell nearly 3%, as a citywide strike disrupted the airport and subway services. It followed a ninth weekend of protests against a controversial extradition bill and China’s growing influence on the city. In a speech Monday, Hong Kong’s leader Carrie Lam said society has become dangerous and unstable. The city’s stock market has fallen 9% in the past few weeks as the protests dent business sentiment and weigh on economic growth.

The selloff in stock markets spilled into debt markets.


Photo:

Qilai Shen/Bloomberg News

The declines in Asian stock markets came after U.S. stocks capped their worst week in months following Mr. Trump’s threats to extend tariffs to essentially all Chinese imports. That came shortly after the Federal Reserve lowered interest rates for the first time since 2008. Investors interpreted the rate cut as a pre-emptive move to counter slowing global growth and the worsening trade spat.

China’s central bank said Monday the yuan’s decline was a result of trade protectionism and higher tariffs on Chinese goods. The People’s Bank of China said the yuan remains stable and strong against a trade-weighted basket of currencies and that the bank has the ability to keep it at a “reasonable equilibrium.” It also said it would crack down on short-term speculation in the yuan.

What took people by surprise was the speed of the currency’s decline, said Weiqi Zhu, a fund manager at Gao Zheng Asset Management in Hong Kong. “To breach 7, people were thinking OK, maybe one week or two weeks’ or three weeks’ time. Not Monday morning,” he said.

At more than 7 against the dollar, the yuan has weakened beyond a point that policy makers have defended at various times in recent years. The worry is a weaker yuan could hurt Chinese residents and companies, prompting a capital flight similar to what took place in 2015 and 2016.

The U.S. dollar was mostly unchanged, with the WSJ Dollar Index, which measures the dollar against a basket of currencies, broadly flat. The British pound slipped 0.4% against the dollar.

Stocks in mainland China were lower Monday, with the Shanghai Composite Index down 1.6%. while stocks in Shenzhen lost 1.5%.


“To breach 7, people were thinking OK, maybe one week or two weeks’ or three weeks’ time. Not Monday morning.”


—Weiqi Zhu, Gao Zheng Asset Management

Monday’s selloff also spilled into corporate debt markets. Spreads on U.S. dollar investment-grade and high-yield bonds widened, traders said, meaning investors were demanding to be paid more to take on risk.

Investors flocked to assets viewed as havens in times of volatility. U.S. Treasurys rallied, pushing the benchmark 10-year yield down to 1.765%, its lowest since November 2016, from 1.864% Friday. Bond yields and prices move in opposite directions. The Japanese yen strengthened 0.7% against the dollar.

Investors were awaiting U.S. nonmanufacturing index data for July, which will give an indication of activity in the services sector. Economists surveyed by The Wall Street Journal expect that the index increased slightly to 55.7 in July.

In commodities, U.S. oil prices fell, with West Texas Intermediate crude down 1.3% to $54.91 a barrel. Gold gained 0.8%.

Write to Steven Russolillo at steven.russolillo@wsj.com and Frances Yoon at frances.yoon@wsj.com

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