(Update) The FTSE 100 snapped its winning streak after three days of gains as markets finally took notice of the threat of escalating tensions between the US and China over Hong Kong.
The blue-chip index opened 57 points, or 0.9%, lower but extended its decline in the afternoon as Wall Street opened lower, trading 95 points or 1.5% down at 6,123 as optimism over the easing of coronavirus-related lockdown restrictions finally gave way to concerns over the rapidly deteriorating relationship between the US and China, which saw the US stock market close lower and Asia fall overnight.
US president Donald Trump is expected to respond today over China’s imposition of a national security law on Hong Kong, a key financial hub, which his foreign secretary has already warned could see the US strip Hong Kong of its special trade status as it considers the city to be no longer autonomous from the Chinese mainland.
Hong Kong’s government told the US to keep out of its affairs and warned withdrawing its special status could backfire on the North American economy.
‘Any sanctions are a double-edged sword that will not only harm the interests of Hong Kong but also significantly those of the US,’ the former UK colony’s pro-Beijing government said last night.
Fiona Cincotta, analyst at City Index, said the tensions between the two powers were ‘now at boiling point’ and ‘traders are no longer able to brush off the spat’.
‘Risk off is dominating as investors look ahead to Trump’s response...Stocks on Wall Street reversed on the announcement of Trump’s press conference, finishing the day lower. Asia also traded on the back foot,’ she said.
Cincotta predicted that Trump could ‘announce sanctions on several Chinese individuals and remove Hong Kong’s special trade status’ but said the recent clash only adds to ‘a list of other grievances between the world’s largest economies, including Huawei, human rights in Xinjiang, trade, and currency wars’.
‘The fear is that the US-China spat could hamper a fragile economic recovery from the coronavirus,’ she said.
Shares that had made the biggest gains in the relief rally this week dropped to the bottom of the main market, with cruise operator Carnival (CCL) sliding 9.8%, or 116p, to £10.68 after a class action lawsuit was filed against the company, accusing it of making false and misleading statements about passengers infected with Covid-19 on two Carnival cruise ships.
It was swiftly replaced at the bottom of the FTSE 100 by Rolls-Royce (RR), which tumbled 11% or 35p to 283p after ratings agency S&P downgraded its credit to junk.
‘Mid-cap’ stocks were also under pressure with the FTSE 250 index retreating 243 points or 1.4% to 17,094.
The biggest loser was travel group Tui (TUI), which gave back some of the stellar gains it has enjoyed all week, dropping 19%, or 99p, to trade at 422p.
Telecoms tower group Helios Towers (HTWS) declined nearly 10% or 16p to 150p per share on profit taking after the shares reached a year-high yesterday.
Smaller companies were a bit more resilient with the FTSE Small Cap shedding 35 points or 0.7% to 4,863.
Bargain hunters pushed up specialist real estate investment trust GCP Student Living (DIGS) which rallied 3.7% or 4.8p to 134.2p after recent falls.
UK smaller companies trust Strategic Equity Capital (SEC) was bid up 4.8% or 8.5p after its shares fell to a wide discount.
Property lender Real Estate Credit Investments (RECI) continued to revive from last month’s lows, up 4.6% or 5.5p at 125.5p.
But BMO Private Equity (BCPT) shed a further 7.9% or 27.5p to 323p.