By Paul J. Davies 

U.S. stocks were set to open lower Thursday after China hardened its line going into trade talks set to start later in Washington.

The S&P 500 and the Dow Jones Industrial were both priced to fall about 0.7% in futures markets, following European and Asian shares lower. The Stoxx Europe 600 slipped 0.8%, while the FTSE 100 in London was down 0.3%. Share indexes in China, Hong Kong and Korea all fell earlier Thursday.

The Wall Street Journal reported late Wednesday that Beijing has threatened unspecified retaliation if the White House pushes through tariff increases. It also said the Chinese leadership has apparently taken President Trump's hectoring of the Federal Reserve chairman as a sign he thinks the U.S. economy is more fragile than he has publicly claimed.

"Equities have had one of the strongest starts to a year in 30 years, but most of the good news is now in the price," said Graham Secker, European equity strategist at Morgan Stanley. "The latest twist in the U.S.-China trade negotiations adds another layer of uncertainty and it's tricky to work out what's true versus what's rumor and speculation."

The trade-related uncertainty has pushed down shares all week in the U.S. and brought a spike in volatility with the Cboe Volatility Index, a measure of stock-market turbulence known as the VIX, shooting higher early in the week and staying elevated into Thursday at levels not seen since early January.

This adds another level of pain to many fund managers who have gotten into the business of effectively selling insurance against large market moves in order to earn premiums that boost their returns, according to Helen Thomas, founder of independent research firm, Blonde Money.

But this volatility-selling activity is also undermining the usefulness of the VIX as an indicator of what might happen, which she said leaves the prices of stocks as well as currencies vulnerable to sudden, sharp moves.

"You end up with a world that looks like it is ignoring any risk -- political or economic -- until it becomes so patently obvious that it's going to happen that you then get really big moves," Ms. Thomas said.

As trade tensions rose, the Chinese currency also fell to its weakest level since early January, hitting 6.85 yuan to the dollar in offshore futures markets. The dollar rose against a broad basket of currencies, with the WSJ Dollar Index up 0.04%.

Investors sought the safety of government bonds, pushing up their prices and cutting their yields. U.S. 10-year Treasury yields dropped to 2.441%, their lowest levels since the end of March, while German 10-year bund yields also slipped to their lowest since late March, hitting -0.059%.

That hit stocks of European banks as falling government bond yields signaled ongoing pressure on profitability. Deutsche Bank fell 2% to EUR6.90, not far above its record low closing price of EUR6.75 in late December last year.

In another sign of haven-seeking, gold was up 0.05% at $1,281.90 an ounce, while oil slid 0.1% to $70.31 a barrel.

Write to Paul J. Davies at paul.davies@wsj.com

 

(END) Dow Jones Newswires

May 09, 2019 09:21 ET (13:21 GMT)

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