US sanctions on Huawei send global stocks reeling; oil gains

European stocks fell, government bond yields slipped and the Japanese yen firmed on Thursday after the US government hit Chinese telecoms giant Huawei with severe sanctions, further straining Sino-US trade ties.

An index of European shares fell as much as 0.5% in early European trading with the German stock index down 0.4%. US stock futures were down 0.4%, pointing to a weak start on Wall Street.

The broad weakness in European markets was somewhat offset by small gains in Chinese and Hong Kong stock indexes leading to only marginal losses on a global stock index as investors expected state authorities to step in to support the market and stabilize sentiment.

“Chinese stocks are up as markets expect authorities to intervene to support sentiment but this kind of activity is not sustainable and unless we see a clear resolution in the China-US trade conflict, overall sentiment will remain weak,” said Neil Mellor, a senior FX strategist at BNY Mellon in London.

While benchmark indexes in China and Hong Kong were up between 0.3-0.8% at the close of trading, bond markets were signalling more pain for risk appetite.

Core German government bond yields were flirting with their lowest level in nearly three years while Dutch bond yields were about to dip into negative territory, a phenomenon not seen since October 2016.

Late on Wednesday, the US Commerce Department said it was adding Huawei Technologies Co Ltd and 70 affiliates to its “Entity List” - a move that bans the company from acquiring components and technology from US firms without government approval.

The move took global markets by surprise as sentiment had steadied somewhat in the previous session on news that US President Donald Trump was planning to delay tariffs on auto imports after a swathe of weak US and Chinese economic data.

As trade tensions have made a reappearance on investors’ radars, weak US data has also ratcheted up market expectations of a US interest rate cut in the coming months.

In the United States, retail sales unexpectedly fell in April as households cut back on purchases of motor vehicles and a range of other goods, while industrial production fell 0.5% in April, the third drop this year.

Yields on 10-year US Treasury bonds eased to 2.366%, near a 15-month low of 2.340% touched on March 28.

Fed funds rate futures are fully pricing in a rate cut by the end of this year and more than a 50% chance of a move by September.

“The markets are inching step by step in pricing in a rate cut. That is a sea change from a year ago when the consensus was three to four rate hikes a year,” said Akira Takei, bond fund manager at Asset Management One. Falling US yields have eroded support for the greenback with the dollar down 0.1 per cent against a basket of its rivals.

Oil prices gained on the prospect of mounting tensions hitting global supplies despite an unexpected build in US crude inventories.

Brent crude rose 0.3% to $71.99 a barrel, while US West Texas Intermediate (WTI) crude fetched $62.26, also half a per cent higher.

Gold edged up to $1,296.9 per ounce.

Oil prices rose on Thursday for the third day in a row as fears of supply disruptions amid heightened tensions in the Middle East overshadowed swelling US crude inventories.

Brent crude futures were at $72.30 a barrel at 0839 GMT, up 53 cents from their last close. Brent is heading for its biggest weekly rise in six weeks.

US West Texas Intermediate (WTI) crude futures were at $62.49 per barrel, up 47 cents from their previous settlement.

Oil was drawing support from the risk of conflict in the Middle East, with helicopters carrying US staff from the US embassy in Baghdad on Wednesday out of apparent concern about perceived threats from Iran.

“Brent looks poised to breach the upper bound of its recent $70-$73 a barrel price range as bullish headlines from the (Mideast) Gulf continue worrying investors,” Citi said in a note.

US crude oil inventories rising to their highest since 2017 helped cap prices, but government data pointed to a lower boost to stocks than previously released industry data and falling gasoline stocks also mitigated the bearish sentiment from the data. Also keeping prices in check is uncertainty about whether Opec and other producers will maintain into the second half of the year supply cuts that have boosted prices more than 30% in 2019.

The Organization of the Petroleum Exporting Countries (Opec) said on Tuesday that world demand for its oil would be higher than expected this year.

The so-called OPEC+ group of producers, which includes Russia, meets next month to review whether to maintain the pact beyond June.

The oil market is marked by tight supply.

An end this month to US waivers that allowed some countries to buy Iranian oil after the reimposition of US sanctions has prompted Tehran to relax restrictions on its nuclear programme and threaten action that could breach a 2015 nuclear deal.

Agencies