FTSE 100 falls 2.5% on US-China tensions and industrial woes

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
President Donald Trump in the White House Oval Office. (Evan Vucci/AP)

European stocks ended the week on the back foot after days of solid gains.

Major markets opened lower on Friday and remained in the red for the session. Analysts blamed continued tensions between the US and China, while industrial and auto stocks were under pressure after massive job cuts were announced at Renault.

The FTSE 100 (^FTSE) had lost 2.5% by the time trading ended on Friday. The DAX (^GDAXI) dropped by 1.6% and the CAC 40 (^FCHI) sunk 1.5%. The Euronext 100 (^N100) was down 1.4%.

Industrial and auto stocks suffered the biggest losses across Europe.

In London, the engine maker Rolls-Royce (RR.L) fell 14.8%. The stock has been under pressure in recent days after hedge fund AKO Capital sold its stake and S&P Capital downgraded Rolls-Royce’s credit rating.

Other manufacturers also came under pressure. Melrose Industrial (MRO.L) shed 8.5% and Meggitt (MGGT.L) fell 6.1%.

In Paris, Renault (RNO.PA) fell 7.7% after announcing 15,000 job cuts globally. The news hit sector rivals such as Volkswagen (VOW3.DE), which slipped 3.4% in Frankfurt, and Mercedes-owner Daimler (DAI.DE), down 4.7%.

However, losses were broad-based. Micheal Hewson, chief market analyst at CMC Markets, said the sour mood was due to “reports that President Trump was going to be holding a press conference later today on China.”

Details of the press conference were scarce on Friday but the President kept up the focus with a tweet simply saying: “CHINA!”

Chinese authorities on Thursday (28 May) voted to approve a controversial security law Beijing is trying to impose on Hong Kong. The region has traditionally been self-governing but China has tried to assert more authority over in recent years, sparking widespread protests in Hong Kong.

“Earlier this week US Secretary of State Mike Pompeo said that the US no longer considered Hong Kong as autonomous from China, and as such [that] would mean that the region would no longer be subject to the favourable trade relationship currently in place,” Hewson said.

“The US house also passed a bill, earlier this week, authorising sanctions against senior Chinese officials for human rights abuses against Muslim minorities, so today’s press conference could well up the ante further if President Trump signs off on that bill as well as implementing further measures that might hint that the US is keen to send the Chinese a message.”

Sebastien Galy, a senior macro strategist at Norwegian bank Nordea, said Trump was likely to confirm that “Hong Kong is losing its special status and will be treated as a province of China mainland legally.”

“China is likely to react by removing the dollar peg which preserved the sense of independence of Hong Kong,” Galy wrote in a note.

“The White House in essence is pushing China into nationalism by attacking it, thereby isolating it from the West, a strategy unlikely to succeed much, though the value of Hong Kong as a window to China has shrunk considerable with the loss of legal independence.”

US stock markets had ended Thursday and opened lower again on Friday.

By the end of trading day in Europe, the S&P 500 (^GSPC) was down 0.3% and the Dow Jones Industrial Average (^DJI) had lost 0.7%. The Nasdaq (^IXIC) managed a rise of 0.2%.

Overnight in Asia, Japan’s Nikkei (^N225) fell 0.1%, the Hong Kong Hang Seng index (^HSI) slid 0.7%, and China’s Shanghai Composite (000001.SS) rose by 0.2%. Australia’s ASX 200 (^AXJO) dropped by 1.6%.

While European stock markets were under pressure Friday, stocks have enjoyed five straight sessions of strong gains. Investors have been buoyed by the continued easing of COVID-19 lockdown measures around the world, which should spur economic recovery. The FTSE 100 has risen over 2.5% since the end of last week.