LONDON MARKETS: FTSE 100 Logs 3rd Straight Drop As U.S.-China Trade Fight Intensifies

By Carla Mozee, MarketWatch

Miners fall on worries about metal demand from China

U.K. stocks finished in the red Tuesday, as trade tensions between the U.S. and China escalated after U.S. President Donald Trump threatened additional tariffs on $200 billion imported Chinese goods.

How markets moved

The FTSE 100 index lost 0.4% to end at 7,603.85, logging a third straight decline. Tuesday's finish also marked its lowest close since May 8, according to FactSet data.

The basic materials group of the index fell by the most, but the utility and telecommunications groups joined the consumer goods sector in moving higher. On Monday, the London benchmark slipped by less than 0.1% (http://www.marketwatch.com/story/uk-stocks-fall-as-trade-conflict-spooks-traders-2018-06-18).

The British pound had last fallen to $1.3168, breaking below $1.3200 for the first time since November 2017, according to FactSet data. Sterling traded at $1.3245 late Monday in New York.

What drove markets?

The intensifying U.S.-China trade spat commanded market action on Tuesday, after Trump threatened further tariffs on Chinese goods. (http://www.marketwatch.com/story/trump-seeks-additional-200-billion-in-tariffs-against-china-and-threatens-even-more-2018-06-18)

"Further action must be taken to encourage China to change its unfair practices, open its market to United States goods, and accept a more balanced trade relationship," Trump said in a statement late Monday.

Beijing, meanwhile, threatened to impose tariffs on another batch of U.S. products (http://www.marketwatch.com/story/china-threatens-further-tariffs-on-us-products-as-trade-conflict-escalates-2018-06-19) if the Trump administration follows through with a second round of levies, the state-run Xinhua News Agency reported. China had previously announced plans for retaliatory tariffs on U.S. goods worth $34 billion, including soybeans, whiskey and electric cars.

Read:Escalating U.S.-China trade spat comes at a bad time for global growth, economist says (http://www.marketwatch.com/story/escalating-us-china-trade-spat-comes-at-a-bad-time-for-global-growth-economist-says-2018-06-15)

Asian equities sold off on the worsening tensions, with the Shanghai Composite sliding 3.8%, and the Shenzhen index tanking 5.8%. Inspired by the Asia session, stocks in the U.K. and the broader European equity market moved sharply as well. On Wall Street, the Dow Jones Industrial Average faced losing the gains it's made in 2018. (http://www.marketwatch.com/story/dow-futures-slump-more-than-300-points-as-fears-of-a-us-china-trade-war-ratchet-up-2018-06-19)

Still, the FTSE 100 did bounce back from an intraday loss of 1.1%, not least thanks to the ailing pound.

"It appears that the pound's own half a percent decline against the dollar -- the currency's balking at the government's ongoing Brexit battles -- helped the FTSE staunch its losses. Cable is now under $1.318 for the first time in seven months, with sterling [is] likely praying for the slightly whiff of hawkishness from the Bank of England on Thursday," said Spreadex financial analyst Connor Campbell in a note.

Revenue made overseas by multinational companies can be bolstered by pound weakness and, in turn, help drive up shares of those companies listed on the blue-chips benchmark.

On Monday, the U.K. House of Lords voted by 354 to 235 to give members of parliament in the House of Commons a so-called "meaningful vote" on the final deal that will take the U.K. out of the European Union, or Brexit. The result is considered a defeat for the U.K. government, led by Prime Minister Theresa May. Lawmakers in the House of Commons were expected to debate the issue again on Wednesday.

What are strategists saying?

"So far the trade war has been confined to trade. The fear, however, is that it may spill over into the financial world. Specifically, China could start selling off some of its massive holdings of Treasury bonds. The country owns some $1.18 trillion of Treasuries, or 30% of all foreign official holdings of Treasuries, which is not to mention their holdings of agency bonds and others," said Marshall Gittler, chief strategist at ACLS Global, in a note.

"Of course, to some degree it would be shooting themselves in the foot to sell these bonds aggressively, because once the market realized what was happening, bond prices would plunge. However, U.S. mortgage rates would soar as a result, and China might feel the pain was worth it to make middle-class U.S. voters sit up and take notice," Gittler said.

Read:Trump's constant threats, reversals spur investors to see him as the boy who cried 'Wolf!' (http://www.marketwatch.com/story/trumps-constant-threats-and-reversals-spur-investors-to-see-him-as-boy-who-cried-wolf-2018-06-04)

Stock movers

Particularly mining stocks were dragged lower, as analysts have said a trade war could lead to reduced demand for industrial and precious metals. China is the world's largest buyer of copper.

Shares of copper producer Antofagasta PLC (ANTO.LN) closed down 1.8%, iron ore producers BHP Billiton PLC (BLT.LN) and Rio Tinto PLC (RIO.LN) dropped 2.2% and 3.2%, respectively.

Mining stocks make up 87% of the basic materials sector on the FTSE 100, and that sector carries a more than 9% weighting on the benchmark, according to FactSet data.

Off the FTSE 100, shares of Debenhams PLC (DEB.LN) plunged 10.7% after the department-store chain warned it expects fiscal 2018 pretax profit to miss expectations (http://www.marketwatch.com/story/debenhams-warns-on-full-year-profit-2018-06-19) as it faces increased competitor discounting and weakness in key markets.

(END) Dow Jones Newswires

June 19, 2018 12:59 ET (16:59 GMT)

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