The steep falls were caused by an unexpected and sudden escalation in the trade conflict between the United States and China with both sides announcing tariff increases on the others imports on Friday.
Shortly before US markets opened, China’s finance ministry announced it would apply additional tariffs of between 5 per cent to 10 per cent on $US75 billion ($111 billion) worth of US imports entering the country. The proposed tariffs would be introduced in two tranches – September 1 and December 15 – the same dates slated by the United States for the introduction in new tariffs on $US300 billion worth of Chinese imports announced at the start of August.
In response to Beijing’s move, US president Donald Trump announced via Twitter that he would increase tariff rates on all Chinese goods entering the United States.
“China should not have put new tariffs on 75 billion dollars of United States product,” Trump tweeted.
“Starting on October 1st, the 250 billion dollars of goods and products from China, currently being taxed at 25 per cent, will be taxed at 30 per cent. Additionally, the remaining 300 billion dollars of goods and products from China, that was being taxed from September 1st at 10 per cent, will now be taxed at 15 per cent.”
Trump’s tweets came just after US and Australian stock futures trading closed for the week, hinting the declines on the S&P/ASX 200 may well be larger than futures suggested on Sunday.
“At this stage there is still no end in sight and so sharemarkets likely have to fall further to pressure Trump to solve the issue and de-escalate,” said AMP Capital’s Oliver.
The resumption of trade in Chinese markets is also likely to be influential on the performance of Australian shares, dollar and bonds later on Monday.
Movements in the Chinese yuan will be watched closely given some analysts believe Beijing is attempting to offset the impact of higher US tariffs by allowing its currency to weaken against the greenback.
When the United States announced proposed tariffs on $US300 billion in Chinese goods at the start of this month, China allowed the currency to weaken past seven yuan to the US dollar for the first time since 2008, sparking sharp declines in Australian shares and dollar while Australian bond yields plunged to record lows.
“Given [Beijing’s] goal is presumably to offset some of the impact from additional US tariffs, they are likely to allow the currency to weaken further, probably by 5 per cent – 10 per cent over the coming quarters,” Julian Evans-Pritchard, senior China economist at Capital Economics, said in a note released earlier this month in response to sudden depreciation in the yuan.
The offshore traded yuan, or CNH, finished the week at 7.1331 per US dollar, the weakest close on record. China’s central bank will announce the reference point for the onshore traded yuan around on Monday morning, an event that carries the potential to calm or exacerbate volatility likely to be seen in early trade.
The turmoil has cast a shadow over corporate reporting season. Big names reporting this week include Fortescue Metals, Wesfarmers, Woolworths, Bellamy’s, Boral and Afterpay Touch with about 40 of the ASX 200 yet to report their earnings this season.
There will be some bright sparks on the Australian market, with the gold price up by $29.10 an ounce or 1.9 per cent and iron-ore price also up by $3.95 or 4.6 per cent which could cushion the blow locally.
“We shouldn’t have as big a fall as the US markets,” CommSec chief economist Craig James said.
“That’s easy to say, but we just have to watch what the US futures market is saying as we go through Monday’s session.”
Mr James said it had been a reasonable profit season considering the the backdrop. “It could have been a whole lot worse.”
David Scutt covers markets for The Sydney Morning Herald and The Age