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US President Donald Trump signed into law a bi-partisan bill that voiced support for the anti-government protests, prompting a sharp response from Chinese officials.
That tempered enthusiasm for equities that have been on a roll - with Wall Street hitting multiple records - owing to expectations that the closely followed trade negotiations would lead to a partial pact soon.
"European stock markets are in the red today as US-China trade tensions have ticked up a little on the back of President Trump signing the Hong Kong bill," noted David Madden, analyst at CMC Markets UK.
"This is a new dimension to the US-China relationship, and it has the potential to derail the trade talks. Traders are fearful that China will lash-out at the US, which is why stocks are lower," he said.
European Central Bank data that showed growth in lending to eurozone businesses and households in October, and a stronger economic sentiment indicator for the single currency zone failed to lift the mood.
The dollar was mixed against other major currencies meanwhile, while oil prices were lower.
In New York, the stock markets were closed for Thanksgiving Day.
On Wednesday, Trump put his name to the Hong Kong Human Rights and Democracy Act, which requires the president to annually review the Chinese city's favourable trade status and threatens to revoke it if democratic freedoms there are quashed.
Trump also agreed to legislation banning sales of tear gas, rubber bullets and other equipment used by Hong Kong security forces to put down protests that have wracked the city since June, battering its economy.
The president expressed "respect" for Chinese counterpart Xi Jinping and said he hoped all sides could "amicably settle their differences".
Trump had seemed reluctant to sign the bill with the trade talks still ongoing, but with almost unanimous US congressional support for the measure, he had little political room to manoeuvre.
China hit out at the "extremely abominable" decision and threatened "firm countermeasures" that were not specified, while summoning the US ambassador to lodge a protest.
The law spooked investors who had been in an upbeat mood owing to signs from both sides indicating the first part of a wider agreement was close.
Worries about the trade talks also weighed on oil prices, with traders concerned that a prolonged China-US trade war would hit long-term demand.
Key figures around 1645 GMT:
London - FTSE 100: DOWN 0.2 per cent at 7,416.43 points (close)
Frankfurt - DAX 30: DOWN 0.3 per cent at 13,245.58 (close)
Paris - CAC 40: DOWN 0.2 per cent at 5,912.72 (close)
EURO STOXX 50: DOWN 0.2 per cent at 3,704.48
New York – CLOSED for Thanksgiving Day
Tokyo - Nikkei 225: DOWN 0.1 per cent at 23,409.14 (close)
Hong Kong - Hang Seng: DOWN 0.2 per cent at 26,893.73 (close)
Shanghai - Composite: DOWN 0.5 per cent at 2,889.69 (close)
Euro/dollar: UP at US$1.1008 from US$1.0999 at 2100 GMT
Pound/dollar: DOWN at US$1.2909 from US$1.2921
Euro/pound: UP at 85.29 pence from 85.13
Dollar/yen: FLAT at 109.52 yen
Brent North Sea crude: DOWN 1.0 per cent at US$63.41 per barrel
West Texas Intermediate: DOWN 0.5 per cent at US$57.84 per barrel