The FTSE 100 closed in the red and US stocks fell as investors weighed up rising US-China tensions in the wake of Beijing’s move to assert its authority in Hong Kong.
The UK’s blue-chip index fell around two per cent this morning but pared some of its losses throughout the day. It finished 0.3 per cent lower this afternoon at 5,999 points.
Markets were more positive in Europe, with Germany’s Dax index swinging from red to green and climbing 0.2 per cent. But the continent-wide was Stoxx 600 down 0.1 per cent.
In the US, the Dow Jones index was 0.5 per cent lower in morning trading. The S&P 500 fell 0.3 per cent.
The sell-off was driven by China’s move to impose national security legislation on Hong Kong. The law could ban what Beijing sees as treason and sedition and is likely to reignite the city-wide protests seen last year.
It caused Hong Kong’s Hang Seng stock index to plunge 5.6 per cent overnight. Stephen Innes, chief strategist at Axicorp, said the security plan will “most certainly bring into question HK status as a global banking center”.
It also drew the ire of Washington, spooking investors fearful of another trade war. US President Donald Trump said his government would react “very strongly” if China pressed ahead.
Nonetheless, Jim Reid of Deutsche Bank said, the FTSE 100 and other markets did not appear to be reacting as badly to the latest rise in tensions as they did to trade disputes a year ago. “Maybe the answer to this puzzle lays in the central bank liquidity surge,” Reid said.
Hong Kong tensions knock FTSE 100
The biggest fallers on the FTSE 100 today were companies firmly plugged in to the global economy. Those with strong links to Asia suffered in particular.
Insurer Prudential, which now only focuses on Asia and the US, was the biggest faller. Its shares plummeted eight per cent.
HSBC, which has its roots in Hong Kong and a dual listing there, plunged five per cent. Asia-centric Standard Chartered, which also has a dual listing, dropped two per cent.
British Airways-owner IAG slid seven per cent as US-China tensions raised questions about the global economy.
Utilities and energy groups Severn Trent, United Utilities, National Grid and Centrica also suffered, dropping between three and five per cent in part over worries about demand.
David Madden, market analyst at CMC Markets, said: “Burberry shares have seen some volatility today as they initially traded lower, but they have been in positive territory for the remainder of the session.”
“The pandemic has had a very negative impact on the group in terms of shops and manufacturing,” he said.
Neil Wilson, chief markets analyst at Markets.com, said Beijing’s move gave FTSE 100 investors a new headache. He said they will “need to add renewed Hong Kong-Beijing tensions into their mix of geopolitical risks”.
“The way it fits into the broader US-China rivalry will be closely watched,” he added.
Oil prices slide on fears over demand
Oil prices fell along with the FTSE 100 in the wake of the rise in US-China tensions. Investors fear that Beijing’s move in Hong Kong could cause the US to retaliate economically, perhaps with more tariffs. That would dent demand for oil.
Brent crude oil, the main global price, fell 3.9 per cent to $34.70 per barrel. Meanwhile US benchmark WTI crude dropped 3.5 per cent to $32.70 per barrel.
Oil prices have climbed in recent weeks after a torrid April. Last month, a combination of evaporating demand and market quirks drove the US oil price into negative territory.
“The oil dynamics have undoubtedly improved and it passed the June expiry test with flying colours,” said Craig Erlam, senior market analyst at currency firm Oanda.
He said overall sentiment was being supported by the reopening of economies. “But the outlook is still highly uncertain and numerous risks lie on the horizon, even before you take recent tensions into consideration,” he said.
The dollar gained strength and the pound slipped as investors sold FTSE 100 stocks in search of less risk. Sterling fell 0.4 per cent to $1.218.
Some traders have said they are bearish on the pound with Brexit talks still hanging over the UK.
On US-China tensions, CMC Markets’ Madden said: “Overnight, Beijing said they are committed to the trade deal they struck with the US in January, but given what is going on in relation to Hong Kong, traders are worried the relationship might deteriorate.”
Yet Madden pointed out that Anthony Fauci, a medical expert in the field of infectious diseases, said the results of drug company Moderna’s coronavirus vaccine trial were “promising”.
“That is possibly why stocks haven’t fallen further as some optimism is doing the rounds in relation to the health crisis.”