US pre-open: Stocks to drop after heavy Asian losses
US stocks looked set to drop at the open on Monday amid ongoing concerns about rising bond yields and the trade spat with China.
Bond markets will be closed on Monday for Columbus Day, so there may be some respite for bond yields, which surged to multi-year highs last week, thanks in part to a batch of solid economic data.
At 1220 BST, Dow Jones Industrial Average and Nasdaq futures were down 0.4%, while S&P 500 futures were off 0.3%.
Stocks in Asia fell heavily, with the Shanghai Composite down nearly 4% after the People's Bank of China cut banks' reserve requirement ratio by 100 basis points to boost liquidity and lending. Market analysts said the fact that Chinese authorities are reducing the amount of capital banks need to hold in relation to their loan book suggests concerns about the economy, in turn sparking worries that China is gearing up for a protracted trade conflict.
Neil Wilson, chief market analyst at Markets.com, said: "As feared, it rather looks as though the China will seek to counter tariffs with easing aimed at not only boosting lending but also devaluing the yuan. Against a Fed tightening cycle, such easing easily looks like the PBOC is actively encouraging a weaker currency. This could prompt a response from Washington that could further unsettle markets, but it does indicate real concerns in Beijing about the impact on the economy of tariffs.
"Meanwhile, Washington may already have set the cat among the pigeons to an extent with the clause in Nafta mark two that prevents Canada and Mexico from pursuing trade deals with a non-market economy – i.e China. Over the weekend the White House said it would seek to include this kind of clause in other deals - that would stop the likes of the EU, Japan and the UK from chasing an FTA with China if they also want to court the US. After months of ratcheting up the pressure on China, this move looks to be aimed at further isolating the country on trade."
In Europe, market participants were rattled after the EU reiterated its concerns over Italy's budget plans over the weekend. The European Commission said Italy's proposal to set out a deficit target of 2.4% of GDP for next year was a "source of serious concern". The news sent Italian government bond yields surging and the FTSE MIB tumbling.
In corporate news, offshore drillers Ensco and Rowan were set to gain at the open after the companies agreed to combine in an all-stock deal with an enterprise value of $12bn.
Elsewhere, electric car maker Tesla was higher in pre-market trade after the company said on Sunday night that it has reached its goal of making the Model 3 sedan the safest car ever built.