Global shares lost steam late last week after Washington ordered China’s consulate in Houston to close, prompting Beijing to react in kind by closing the US consulate in Chengdu
US stock futures slipped and Asian shares came under pressure in early Monday trade as tit-for-tat consulate closures in China and the United States fanned worries about worsening diplomatic ties between the world's two largest economies.
S&P500 futures dropped 0.2% while Nasdaq futures lost 0.3%. Japan's Nikkei fell 1.3%, re-opening after a long weekend.
MSCI's broadest index of Asia-Pacific shares outside Japan was flat.
Global shares lost steam late last week after Washington ordered China's consulate in Houston to close, prompting Beijing to react in kind by closing the US consulate in Chengdu.
US Secretary of State Mike Pompeo took fresh aim at China last week, saying Washington and its allies must use "more creative and assertive ways" to press the Chinese Communist Party to change its ways.
"US President (Donald) Trump used to say China's President Xi Jinping is a great leader. But now Pompeo's wording is becoming so aggressive that markets are starting to worry about further escalation," said Norihiro Fujito, chief investment strategist at Mitsubishi Securities.
Hopes of a quick US economic recovery are fading also as coronavirus infections showed few signs of slowing.
That means the economy could capitulate without fresh support from the government, with some of earlier steps such as enhanced jobless benefits due to expire this month.
Investors hope US Congress will agree on a deal before its summer recess but there are some sticking points including the size of stimulus and enhanced unemployment benefits.
US Treasury Secretary Steve Mnuchin said the package will contain extended unemployment benefits with 70% "wage replacement".
Democrats, who control the House of Representatives, want enhanced benefits of $600 per week to be extended and look to much bigger stimulus compared with the Republicans' $1 trillion plan.
In addition to stimulus developments, investors are looking to corporate earnings from around the world for hints on the pace of recovery in the global economy.
Concerns about the US economic outlook started to weigh on the dollar, reversing its inverse correlation with the economic well-being over the past few months.
The dollar index stood at its lowest level in nearly two years at 94.337.
The euro changed hands at $1.16525 having hit a 22-month high of $1.16590 as sentiment on the common currency improved after European leaders reached a deal on a recovery fund in a major step towards more fiscal co-operation.
Against the yen, the dollar slipped 0.2% to 105.93 yen, near Friday's four-month low of 105.68.
Gold rose 0.4% to $1,910.0 per ounce, near its record high of $1,920.4 touched in September 2011, as Sino-US tensions boosted the allure of safe haven assets, especially those not tied to any specific country.
Oil prices dipped in early trade on worries about the worsening relations.
Brent futures fell 0.46% to $43.14 per barrel while US crude futures lost 0.44% to $41.11.