US stocks extend sell-off amid mounting trade tensions

S&P 500 drops more than 2%

US equities were battered by another round of selling on Monday after China allowed its currency to weaken below a key threshold, in a marked escalation with Washington that triggered a sharp sell-off in global stocks and a rally in bonds.

The S&P 500 was down 2.2 per cent in mid-morning trade, putting the equities benchmark on track for its biggest one-day drop since May 13 and a sixth consecutive day of declines. It sets the index up for its longest losing streak in 10 months.

The Dow Jones Industrial Average dropped 2.1 per cent and the Nasdaq Composite fell 2.5 per cent. The Cboe’s Vix, a measure of volatility nicknamed Wall Street’s “fear gauge” jumped above 22 points for the first time since mid-may.

Government bonds extended a recent rally amid swelling demand for perceived havens. US government debt climbed sharply

in price, leaving the 10-year Treasury yield down 8.7 basis points to 1.7684 per cent. It has fallen about 80 bps since the start of May as concerns over the trade debacle and signs of a slowdown in the global economy have built.

The moves in the bond market, with longer-term borrowing costs dropping even further below short-term ones, resulted in the difference between the yields on 3-month and 10-year Treasuries falling to its most negative since April 2007. The inversion of this so-called yield curve has preceded every US recession of the past 50 years.

The drop for stocks, which mirrored those across European and Asian stock bourses, came after last week’s 3.2 per cent fall in MSCI’S All-world stock index — the heaviest retreat since the market ructions of late 2018.

Britain’s FTSE 100 was down 2.8 per cent, France’s CAC 40 shed 2.2 per cent and Germany’s Dax declined 1.8 per cent. MSCI’S broad index of Asian stocks outside Japan fell 2.9 per cent, with Japan’s Topix sliding 1.8 per cent.

Traders priced in further stimulus measures from the Federal Reserve, with futures trade suggesting the central bank’s main rate will be 1.14 per cent at the end of 2020, 10 bps lower than expected on Friday. That means market participants are now forecasting 100 bps of rate cuts by December next year, after the Fed last week cut rates by 25 bps in the first such reduction since the financial crisis.

Across the Atlantic, the yield on Britain’s benchmark 10-year government bond struck a historic low, breaching a trough it hit in the wake of the 2016 Brexit referendum. It was recently down 3.6bp at 0.514 per cent. In Germany, the 10-year Bund yield struck a new record low, falling as much as 4.7bp to minus 0.53 per cent.

The drop in China’s renminbi to under 7 per US dollar also cascaded into other major emerging market currencies, leaving MSCI’S EM FX index down as much as 0.9 per cent in its worst day in more than two years. South Korea’s won was among the worst hit, sliding 1.4 per cent against the US dollar, while other actively traded currencies like South Africa’s rand were also under pressure.