Oil prices and stocks across major markets fell on Tuesday as tensions rose between China and the United States ahead of high-level trade talks, while the British pound sank on reports that Brexit negotiations were close to breaking down.
Gold and the yen rose, indicating an increased appetite for safe-haven assets.
Washington widened its trade blacklist to include some of China’s top artificial intelligence start-ups, punishing Beijing for its treatment of Muslim minorities and ratcheting up tensions ahead of trade talks in Washington this week.
“The headlines are painting a picture of a less optimistic tone to the trade talks this week,” said John Zaller, chief investment officer of MAI Capital Management in Cleveland.
“Anything less than a tariff delay would be a pretty big disappointment for the markets.”
An increase in U.S. tariffs to 30 per cent from 25 per cent on $250 billion worth of Chinese goods is scheduled for Oct. 15.
U.S. stocks briefly cut losses in choppy trading on Tuesday after Federal Reserve Chairman Jerome Powell suggested openness to further rate cuts and said the time has come to allow the Fed’s asset holdings to begin to expand again.
Powell also said the Fed would “soon announce measures to add to the supply of reserves over time.”
However, indexes soon reversed course to fall further in late trading after the U.S. State Department said it is imposing visa restrictions on Chinese officials for treatment of Muslims in Xinjiang.
The interest-rate sensitive financials index was down more than 1 per cent.
Market expectations have increased that the Fed will cut interest rates by a quarter per centage point in October, according to CME Group’s FedWatch tool.
Those bets were bolstered on Tuesday by data that showed U.S. producer prices unexpectedly fell in September.
“The overall tone from the Fed is showing a little more concern,” said Willie Delwiche, investment strategist at Baird in Milwaukee.
“The Fed is trying to send a message of ‘we are paying attention and we are on top of this, and we are going to focus on the mission and not the politics,’” he added.
The Dow Jones Industrial Average fell 314.59 points, or 1.19 per cent, to 26,163.43, the S&P 500 lost 45.8 points, or 1.56 per cent, to 2,892.99 and the Nasdaq Composite dropped 132.52 points, or 1.67 per cent, to 7,823.78.
In Toronto, the Toronto Stock Exchange’s S&P/TSX composite index was down 127.80 points, or 0.78 per cent, at 16,293.95.
The energy sector dropped 3.8 per cent, tracking a slide in oil prices.
Nine of the index’s 11 major sectors were in the red, with industrials sector falling 1.3 per cent and financials sector slipping 0.7 per cent.
A bright spot was the materials sector, which added 1.3 per cent aided by shares of gold mining companies.
Leading the index were Wesdome Gold Mines Ltd., up 5.3 per cent, NovaGold Resources Inc., up 5.1 per cent, and Alacer Gold Corp., higher by 4.6 per cent.
Lagging shares were WSP Global Inc., down 6.5 per cent, Encana Corp., down 6.5 per cent, and Whitecap Resources Inc., lower by 5.9 per cent.
The pan-European STOXX 600 index lost 1.10 per cent and MSCI’s gauge of stocks across the globe shed 0.81 per cent.
Buoyed by gains in Asia, emerging market stocks were little changed. MSCI’s broadest index of Asia-Pacific shares outside Japan closed just 0.24 per cent higher. Japan’s Nikkei rose 0.99 per cent.
Investors of Chinese mainland stocks returned from a week-long holiday to boost the index by 0.3 per cent, but a private survey showed growth in China’s services sector at its slowest in seven months in September.
With the focus turning to trade talks, U.S. President Donald Trump said he hoped Beijing would find a humane and peaceful resolution to political protests in Hong Kong, and said that situation had the potential to hurt the trade discussions.
The flight to safety also pushed some bond prices higher, with German bund yields edging down. U.S. Treasury yields also fell as expectations grew for a Federal Reserve interest rate cut in October following a big drop in the U.S. producer price index and an intensification of trade tensions with China.
Benchmark 10-year Treasury notes last rose 4/32 in price to yield 1.5391 per cent, from 1.553 per cent late on Monday.
Oil prices slid on Tuesday as Washington’s blacklisting of more Chinese companies dampened hopes for a trade deal between the two countries, although unrest in Iraq and Ecuador lent some support to crude prices.
Early in the session, both Brent crude and West Texas Intermediate (WTI) rose more than 1 per cent. But at settlement, Brent was down 11 cents, or 0.2 per cent at $58.24 a barrel while WTI fell 12 cents, or 0.2 per cent, at $52.63.