World stock markets and oil prices tumbled yesterday as China reportedly warned it would limit exports of rare metals, used in cameras, computers, smartphones and televisions, in the latest eruption in its trade war with the United States.
Investor sentiment also took a knock as Chinese technology giant Huawei stepped up its legal battle to overturn US legislation barring American federal agencies from buying its products, as Beijing toughened its trade war stance.
“Again we see how the market is moving around on US-China news flow that is hard to lock down,” commented Niel Wilson at Markets.com.
“China’s threats to stop rare earth exports is clearly a bargaining chip, if not exactly a trump card, but the market is starting to really take seriously," he noted.
Asian equities slid as investors grew anxious about a possible slowdown in the absence of progress in resolving the US-China trade spat.
In a sign of intensifying concern over economic growth, the yield, or rate of return for investors, on the 10-year US government bonds hit 2.22 per cent, the lowest level since September 2017.
“With investors flocking to US 10-year Treasury bonds on Tuesday night - yields are at a 20-month low – the European markets resumed their fearful performance on Wednesday,” said Spreadex analyst Connor Campbell.
“The catalyst for the latest round of losses was a thinly-veiled threat from China over its willingness to throw around its rare earth weight in its battle with the US.”
A Chinese state media report suggested Beijing would restrict exports of rare earths as leverage in the trade dispute.
Rare earths are a key component in electrical devices and any move to restrict their supply would have a devastating impact on manufacturers, with China producing more than 95 per cent of the metals.
“Given that the materials are used in everything from iPhones to missile guidance systems to electric cars... the country may have found its not-so-secret weapon in the trade war,” Campbell added.
Economists agree that the trade dispute between the world's top two economic superpowers will have grim implications for consumers, who will have to bear the costs of punitive tit-for-tat tariffs.
Back in Europe, investors digested the implications of a possible new row between the European Commission and Italian authorities over budget plans that would push Rome's public deficit above the EU limit.
The Commission said it had asked for “clarifications” on Italy's 2019 budget, but Italy's far right Deputy Prime Minister Matteo Salvini brushed off the threat. The yield on 10-year Italian government bonds stood at 2.66 per cent.