Bond yields, stocks fall as trade fears spread to Europe

LONDON (Reuters) – Fears of an escalating trade dispute between the United States and China spread from Asian markets to Europe on Thursday, triggering a fall in bond yields and stocks while a batch of disappointing corporate results also weighed on sentiment.

Germany’s blue-chip index DAX, which is seen as a trade war proxy, fell 1.5% in midday trading while the broader pan-European STOXX 600 was down about 0.8%.

A number of poor trading updates, notably by German industrial conglomerate Siemens, also help drag down European bourses.

US stocks futures for the S&P, Dow Jones and Nasdaq were also trading in negative territory with losses between 0.5% and 0.7%.

Euro zone government bond yields edged down. Borrowing costs in Germany and France pulled back from seven-week highs as demand for safe-haven debt grew after the US administration increased pressure on China by proposing a higher 25% tariff on $200 billion worth of Chinese imports.

MSCI’s broadest index of Asia-Pacific shares outside Japan closed 1.6% down, dragged down by a 1.8% fall in Chinese H-shares.

Analysts blame the current retreat in world stock markets on uncertainty around the trade policy of the Trump administration, while recent corporate results and economic data are seen overall as encouraging.

“One needs to have a strong gut feeling to invest in this environment and in August, I doubt many people will have one,” said Herve Goulletquer, deputy head of research at France’s La Banque Postale Asset Management in Paris.

He added that investors badly needed a “framework of interpretation” to read through the trade statements of the Trump administration and the poor visibility on that front was holding markets back.

Sterling briefly and only modestly rose after the Bank of England hiked interest rates above their financial crisis lows and signaled it was in no hurry to tighten policy further with an uncertain Brexit on the horizon.

The pound rose from $1.3081 to $1.3129 after the decision but quickly gave up its gains and was trading at 1.3050 by 1150 GMT.

“Although today’s hike was priced in already for the most part, it should help to stabilize the pound, which in turn will keep a lid on imported inflation that can be exacerbated by a weakened currency,” said Hinesh Patel, a portfolio manager at Quilter Investors.