European stocks tumbled to a one-month low and German bond yields slipped back into negative territory on Monday after U.S. President Donald Trump threatened to raise tariffs on China, triggering a global rout in risky assets.

In a surprise twist on Sunday, Trump said he would hike U.S. tariffs on $200 billion worth of Chinese goods this week and target hundreds of billions more soon, signaling a major shift. Trump had earlier cited good progress in trade talks and praised his relationship with Chinese President Xi Jinping.

Global investors were caught off guard as they had been largely expecting the two sides to reach a trade agreement soon.

“The market was caught on the wrong foot as everyone expected talks were heading in the right direction and almost close to finishing,” said Daniel Lenz, a rates strategist at Commerzbank. “This was totally out of the blue and the reaction is that we have more risk aversion today.”

The latest episode in the trade war comes on the back of weeks of low market volatility across asset classes and a growing swathe of tepid but steady economic data with little negative surprises lulling investors into a sense of calm.

Chinese shares plunged more than 6 percent, while U.S. stock market futures fell 1.6 percent. Oil prices sank and the Chinese yuan fell to a 10-month low.

MSCI world equity index, which tracks shares in 47 countries, fell half a percent.

Trump sharply escalated tensions between the world’s two largest economies with tweeted comments on Sunday that trade talks with China were proceeding “too slowly”, and that he would raise tariffs on $200 billion of Chinese goods to 25 percent on Friday from 10 percent.

The tweets stirred up the hitherto calm market mood arising from signs of improving economic growth in China and the United States, and from comments from Trump and other senior U.S. officials that trade talks were going well.

China’s foreign ministry said on Monday a delegation was preparing to go to United States for trade talks.

While many market watchers including ING regard the latest episode as a negotiating tactic by Trump, investors pared their positions in risky assets after recent gains.

SEA OF RED
European stock markets were a sea of red while E-Mini futures for the S&P 500 slid 1.7 percent, signaling a rough open for U.S. stocks on Monday.

Germany’s main stock index was down 1.8 percent while a broader index of European shares declined 2 percent to its lowest level since early April.

Moves were slightly exaggerated, with Japanese markets still on holidays while London markets were shut for a local holiday.

Losses in equities translated into gains for bonds with benchmark government bond yields in Germany retreating to a shade below zero and not far from a 2-1/2-year low of minus 0.09 percent hit in late March.

Emerging market currencies and commodity-linked currencies were the hardest hit with the Australian dollar falling half a percent against the greenback while the offshore yuan swooned nearly a percent

In commodity markets, Trump’s tweets sparked a plunge in oil prices.

U.S. crude at one point dropped as much as 3.1 percent to a more-than-five-week low, before bouncing to $60.69 per barrel – still off 1.3 percent on the day. Brent crude LCOc1 was 1.8 percent lower at $69.59 per barrel.

The selloff in risky assets burnished the lure of gold with spot gold up 0.25 percent to trade at $1,282.20 per ounce. – Reuters

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