US-China concerns expected to drive US markets lower

• Japanese and Chinese stocks hit by political and trade concerns.
• Defence and miners drag FTSE 100, as UK unemployment rises to 4.8%.
• US-China concerns expected to drive US markets lower.

Asian markets stumbled overnight, with indices throughout China and Japan heading sharply lower amid political and trade concerns. In Tokyo, political turmoil took centre stage as the ruling coalition fractured following the Komeito party’s decision to withdraw its support for the LDP-led government. The move came just days after Sanae Takaichi was named Japan’s first female Prime Minister, helping to push stocks higher with the so-called “Takaichi trade” building expectations of fiscal expansion and delayed monetary tightening. That thesis is now being reassessed, with investors unwinding positions that had driven yen weakness and equity gains.

In China, the latest escalation in the US–China trade battle also weighed on sentiment. Beijing imposed restrictions on five US units of Hanwha Ocean in response to Washington’s probes into Chinese shipbuilding and logistics industries. Both sides have also introduced new port fees on ocean shippers, further raising costs in an already strained sector. Meanwhile, Chinese officials defended rare earth export measures as national-security driven, not a blanket ban. Still, the fact that China has begun putting additional restrictions on rare earth exports does highlight how they plan to use them as a tool with which to gain concessions going forward.

European equities lost traction this morning, erasing much of yesterday’s upside moves. Defence stocks continue to come under pressure, unwinding some of their gains after the landmark Middle East peace agreement was signed in Egypt yesterday. While Europe’s long-term commitment to higher defence spending in response to Russian aggression remains intact, the near-term easing of Middle East tensions has taken some heat out of the defence sector.

Elsewhere, copper prices slumped on renewed US–China trade concerns, with Anglo American, Rio Tinto, and Antofagasta dragging the FTSE 100 lower. The UK jobs market added to the gloom, with unemployment climbing to a four-year high of 4.8% and a surprise surge in claimant counts (+25.8k). These labour market signals point to mounting pressure ahead of the Chancellor’s upcoming budget. Market chatter suggests the government aims not only to close the fiscal black hole but overshoot, potentially removing the need for further austerity later. However, after the inflationary jolt delivered by the last budget, investors fear another aggressive fiscal push could delay Bank of England rate cuts even further.

Across the Atlantic, US futures point towards a softer open as optimism from the start of the week fades. President Trump’s more conciliatory tone over the weekend hinted at a willingness to avoid the looming 100% tariffs, but Beijing’s response has underscored its determination to assert leverage in negotiations. Rare earths remain the key battleground, with China signalling its readiness to weaponise its dominance in the sector if talks falter.

While risks remain elevated, the fact that the Trump–Xi meeting later this month is still on the calendar suggests both sides want to avoid a complete breakdown. In the meantime, markets are bracing for more headline-driven swings. With earnings season kicking off this week, and geopolitics taking centre stage, traders will have plenty to contend with despite the shutdown-induced decline in economic datapoints.