Asia stocks dented by trade war, Brexit showdown paralyzes pound

TOKYO (Reuters) – Global stocks faced headwinds on Tuesday, stymied by U.S.-China trade frictions while the British pound flirted with 2 1/2-year lows as Prime Minister Boris Johnson indicated he could call an election to block lawmakers’ efforts to avert a no-deal Brexit.

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS shed 0.3% while Japan’s Nikkei .N225 rose by 0.1%.

China’s mainland shares .CSI300 were fractionally lower while Hong Kong’s benchmark edged up 0.1% .HSI.

The United States began imposing 15% tariffs on a variety of Chinese goods on Sunday and China began imposing new duties on U.S. crude oil, the latest escalation in their trade war.

Although U.S. President Donald Trump has said both sides would still meet for talks later this month, tensions have shown little sign of abating.

China said on Monday it lodged a complaint against the United States at the World Trade Organization over U.S. import duties, trashing the latest tariff actions as violating the consensus reached by leaders of China and the United States in a meeting in Osaka.

“We have so many problems around the world, starting from the U.S.-China trade war and Brexit. But investors appear to be getting used to be exposed to them,” said Hiroyuki Ueno, senior strategist at Sumitomo Mitsui Trust Asset Management

“No one really thinks Washington and Beijing will solve the issues. But as long as the U.S. economy keeps going, stock prices will have limited downside,” he said.

U.S. manufacturing survey by the Institute for Supply Management (ISM) due at 1400 GMT Tuesday is a major focus for investors.

Although U.S. manufacturing activity has been slowing in recent months, the ISM’s index has so far stayed above 50, pointing to growth in the sector.

U.S. bond yields rose a tad on profit-taking after a market holiday in the United States on Monday.

The 10-year U.S. Treasuries yield rose 2.5 basis points to 1.532% US10YT=RR, off a three-year low of 1.443% touched last week. The yield dropped 51.5 basis points last month, the biggest monthly drop since August 2011.

In the currency market, sterling dipped 0.25% to $1.2030 GBP=D4, after having dropped 0.85% on Monday. The currency stood just above its 2 1/2-year low of $1.2015 hit on Aug. 12.

Prime Minister Johnson implicitly warned lawmakers on Monday that he would seek an election on Oct 14 if they tied his hands on Brexit, ruling out ever countenancing a further delay to Britain’s departure from the European Union.

“Depending on further developments in UK politics, the pound could see sharp moves in the coming week or two. We think it could fall to as low as $1.13 this month,” said Sumino Kamei, senior currency strategist at MUFG Bank.

Uncertainties over Brexit have already hit the UK economy, with survey by the IHS Markit/CIPS showing British manufacturing contracted last month at the fastest rate in seven years.

The picture is not much better in Europe, and the European Central Bank is widely expected to cut interest rates further into negative levels next week to cushion the blow, pressuring the euro.

The common currency fell 0.25% to a two-year low of $1.0939 EUR=. The two-year German government bond yield has dipped to minus 0.919% on Monday, near its record low around minus 0.964% hit in early 2017.

The offshore Chinese yuan dropped to a record low of 7.1975 per dollar CNH= on Tuesday morning while the Australian dollar lost 0.3% to $0.6700 AUD=D4, a stone’s throw from a decade-low of $0.66775 hit last month.

The Reserve Bank of Australia is expected to keep its policy on hold on Tuesday, though many market players anticipated an interest rate cut next month.

Argentine bond prices fell to record lows on Monday and the official and black market pesos diverged after the country imposed capital controls in a bid to stem a currency rout that is sharpening the risk of default.

The peso ARS=RASL closed 0.88% stronger in official markets, but closed 0.79% weaker in the black market at 63.5 per dollar.

Oil prices were also dented by concerns over the trade war. U.S. West Texas Intermediate (WTI) crude CLc1 lost 0.31% to $54.93 per barrel. International benchmark Brent futures LCOc1 rose 0.15% to $58.75 per barrel.

(The story removes extraneous letters from third paragraph.)