The downbeat mood comes as investors fret over signs the global economy is slowing down, with the International Monetary Fund forecasting the weakest growth in a decade owing to long-running tariff disputes.
Days before high-level negotiations were due to resume, the US announced restrictions on 28 Chinese entities over human rights violations in Xinjiang province and imposed visa restrictions on some officials.
Then Bloomberg News reported unnamed Trump administration officials had said the White House was mulling new measures to curtail US investment in the country.
For its part, Beijing has hit out at the decisions and moved to take steps against the National Basketball Association in a brewing row over a team manager’s remarks on Hong Kong’s protest movement.
A report this week had already said China had narrowed the issues it was willing to discuss at the talks, with observers saying leaders felt in a stronger position as Donald Trump faces an impeachment inquiry at home and a weakening economy.
“It will be interesting to see how it plays out this week between the US and China,” Andrew Balls, at Pacific Investment Management, told Bloomberg News.
The flare-up comes “at a time when we already see growth pretty weak in the first half of next year and you have at least some evidence of weakness in manufacturing spilling into services”.
While economic data has been increasingly weak in recent months, hopes for this week’s talks have been providing some much-needed support.
But the latest developments were a reminder that progress would likely be rocky. All three main indexes on Wall Street sank and in afternoon trade Hong Kong fell 0.7% while Tokyo closed down 0.6%. Sydney was also off 0.7%, Singapore dropped 0.8% and Taipei lost more than 1%. Manila, Wellington, Taipei and Jakarta were also in the red but Mumbai and Shanghai posted gains.
In early trade London, Paris and Frankfurt were all flat.
“The US tactics are undoubtedly a high risk, seeking to pressure the Chinese trade delegation before the main event really gets underway,” said Jeffrey Halley, OANDA senior market analyst for Asia-Pacific. “Financial markets certainly thought so, with Wall Street a sea of red.
The very real danger is the whole process backfires.” There was little support from comments by Federal Reserve boss Jerome Powell, who said the US economy would continue to expand but that trade wars and Brexit were causing headwinds.
The remarks suggested the bank was in no rush to cut interest rates further, with unemployment at a 50-year low, despite jobs creation slowing.
On currency markets, the pound struggled to recover from Tuesday’s losses as Brexit talks between Britain and the European Union teetered on the brink, with both sides blaming the other with just three weeks until the October 31 deadline. Prime Minister Boris Johnson and German Chancellor Angela Merkel were unable to reach an agreement over the Northern Ireland issue during a telephone conversation. A Downing Street official quoted Merkel as saying the Brexit talks were “close to breaking down”.
With many economists warning a no-deal Brexit could be calamitous for the British economy, the pound tumbled against the dollar and euro and there were warnings it could fall even further.
With negative sentiment prevalent across trading floors, the price of oil extended losses as investors worry about the impact of the prolonged trade war on demand.
In Tokyo, the Nikkei 225 closed down 0.6% to 21,456.38 points; Hong Kong — Hang Seng ended down 0.7% to 25,702.95 points and Shanghai — Composite closed up 0.4% to 2,924.86 points yesterday.
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