Australian shares closed sharply lower on Friday after fears of a trade war were sparked by US president Donald Trump's surprise announcement of tariffs on imports of steel and aluminium.
The benchmark S&P/ASX200 index ended down 0.74 per cent at 5,928.9 points with all sectors in the red, led by losses in resources and industrial stocks.
Mr Trump announced tariffs on steel and imported aluminium after meeting with US industry officials, saying American steel and aluminium industries had been treated unfairly by other countries for decades.
He said he would sign off on the tariffs - 25 per cent on steel and 10 per cent on aluminium - next week.
Wall Street dropped sharply, with the Dow Jones Industrial Average falling 1.7 per cent.
Phillip Capital senior client adviser Michael Heffernan said while investors should not over-react and "take a cold shower" when a statement from the US president moves markets, the talk of tariffs sparked weakness in regional markets and the local resources sector.
"There is absolutely no fundamental problem with our market," Mr Heffernan said.
"Just as (US Federal Reserve chair) Jerome Powell said: 'the share market is not the economy', its volatility doesn't affect the underlying economics of America - or Australia - which are going great guns."
After two days of market declines in the US sparked by fears of rapid interest rate hikes, trade war fears drove a further descent on Friday.
Asian-Pacific markets were all lower, with Japan's Nikkei 225 down 2.4 per cent and on Friday afternoon US stock market futures were pointing to a further fall when trade starts for the Friday session there.
On the ASX, Australia's biggest steel maker BlueScope closed up 13 cents, or 0.8 per cent higher, at $16.325, with its significant US interests likely to contribute a net benefit from the proposed 25 per cent US tariff on steel imports.
But iron ore miners BHP Billiton and Rio Tinto were down 1.6 and 1.3 per cent, to $29.63 and $76.86, respectively.
Goldminers Newcrest and Evolution were up one per cent and 0.7 per cent, each as investors sought the relative safe haven.
A drop in global oil prices left energy companies lower, with Woodside Petroleum down 0.4 per cent, to $28.50 and Santos down one per cent, to $4.92.
Woolworths was down 0.6 per cent after the Federal competition watchdog said it was launching Federal Court action accusing the company of falsely labelling its disposable picnic products as biodegradable.
Blood plasma products maker CSL which has significant US exposure, extended its Thursday 1.1 per cent fall, dropping another 0.9 per cent on Friday to be $160.05.
Australia's top four banks were between 0.8 per cent and 0.4 per cent in the red, except for Westpac, which ended 0.1 per cent ahead.
And Telstra is at six year lows, trading five cents, or 1.5 per cent lower, to $3.27.
Meanwhile, the local currency has been climbing alongside other currencies against the greenback which has weakened since the overnight tariff announcement.
At 1700 AEDT, Australian dollar was at 77.61 US cents, up from 77.28 US cents.
ON THE ASX:
* The benchmark S&P/ASX200 index was down 44.4 points, or 0.74 per cent, at 5,928.9 points at 1630 AEDT.
* The broader All Ordinaries index was down 47.3 points, or 0.78 per cent, at 6,028.4 points
* The SPI200 futures contract was down 50 points, or 0.84 per cent, at 5,910.0 points.
* National turnover was 2.97 billion securities traded worth $6.1 billion.
CURRENCY SNAPSHOT AT 1700 AEDT:
One Australian dollar buys:
* 77.61 US cents, from 77.25 on Thursday
* 82.11 Japanese yen, from 82.54 yen
* 63.21 euro cents, from 63.38 euro cents
* 56.27 British pence, from 56.18 pence
* 106.70 NZ cents, from 107.29 cents
GOLD:
The spot price of gold in Sydney at 1700 AEDT was $US1,318.311 per fine ounce, from $US1,312.81 per fine ounce on Thursday.
BOND SNAPSHOT AT 1630 AEDT:
* CGS 4.50 per cent April 2020, 1.9624pct, from 1.9786pct
* CGS 4.75pct April 2027, 2.6792pct, from 2.6962pct
Sydney Futures Exchange prices:
* March 2018 10-year bond futures contract at 97.28 (implying a yield of 2.72pct), from 97.26 (implying a yield of 2.74pct) on Thursday
* March 2018 3-year bond futures contract at 97.93 (2.070pct), from 97.915 (2.085pct).
(*Bond market closes taken at 1630 AEDT previous local session; currency closes taken from 1700 AEDT previous local session)
The Dow fell as much as 391 points on Friday, but it recovered most of those losses and finished down 71. The Nasdaq and the S&P 500 both ended with modest gains after falling 1% earlier in the day.
The sell-off began Thursday after Trump announced that his administration would impose a 25% tariff on steel imports and a 10% tariff on aluminum. Trump has not said whether some countries would be excluded from the tariffs.
For the market, "this really could be something new and worse than we have seen so far," said Brad McMillan, chief investment officer at Commonwealth Financial Network.
Trump's plans caught investors off guard and raised fears about a tit-for-tat retaliation from China and other major US trading partners.
Canada, Germany, the European Union and Australia all denounced the move. The World Trade Organization is "clearly concerned," director general Roberto Azevedo said. "The potential for escalation is real."
On Friday, Trump elevated concerns about a full-blown trade fight even further by tweeting that "trade wars are good, and easy to win."
"Markets hate uncertainty and we still don't know exactly who and by how much these tariffs will impact trade," said Ryan Detrick, chief senior market strategist at LPL Financial.
Investors turned to domestically focused companies that are less sensitive to retaliatory tariffs, such as biotech and health care. Johnson & Johnson (JNJ), Merck (MRK) and Pfizer (PFE) were among the biggest winners of the day. The Russell 2000 index of smaller companies gained 1%.
"As the economic cycle ages, volatility is more normal, but the overall economic backdrop is still quite positive," Detrick said.
Corporate America has warned that tariffs will harm the economy and the market.
Costs could soar for American companies that rely on aluminum and steel produced overseas, such as auto and plane manufacturers and construction. Imports make up about a third of the steel American businesses use every year, and more than 90% of aluminum used here.
If the tariffs bring more expensive steel and aluminum, companies that rely on those materials may pass some of those costs to consumers. That raises the possibility inflation will creep up.
And if other countries decide to hit back with their own tariffs on US goods, export-dependent industries such as agriculture will become less competitive overseas.
On the other hand, McMillan said, if companies decide to eat most of those higher costs, their profit will take a hit, hurting their stock values.
Shares of Boeing (BA) dropped 1% and Caterpillar (CAT) lost 2% on Friday. Ford (F) gained 1%, but General Motors (GM) lost 1%.
The tariffs caused yields on U.S. bonds to fall on Thursday as investors sought a haven from volatile stocks. Yields and prices move in opposite directions. The 10-year Treasury was back up slightly Friday to 2.86%.
Domestic steel and aluminum manufacturers are the winners from Trump's tariff announcement.
U.S. Steel (X) and AK Steel (AKS) soared on Thursday 6% and 10%, respectively, on Thursday. U.S. Steel lost 1% on Friday, and AK Steel gained 1%.
McMillan attributed the slight drop for some steel companies to investors not reading too much into Trump's tweets.
"This has the potential to get worse, but there's a long way to go before we have a trade war," he said. "What Trump says and what he does are often two different things."
Welles Orr, a former assistant US Trade Representative under President George H.W. Bush and a trade consultant, said the steel and aluminum industries are not immune to global backlash.
"This might look and make you feel good at the outset," Orr said. "But in the long run, it's going to hit so many industries."
The tariffs also raise doubts about the future of NAFTA, Orr added. Trump has threatened to tear up the trade agreement with Canada and Mexico. The three countries are in their seventh round of talks.
Source: Netwealth Morning Business Roundup
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