Stock futures slid Wednesday after U.S.-China relations showed signs of further deterioration, and investors questioned whether Congress will reach an agreement on the next stimulus bill before lawmakers start their summer break.
Futures tied to the S&P 500 ticked down 0.3%. The benchmark index has advanced on each of the past three trading days and stands just 3.8% below its record high after a four-month rally.
Stock futures turned lower after China’s Foreign Ministry said the U.S. had instructed China to close its consulate in Houston. That raises the specter of an escalation in tensions between the governments of the world’s two largest economies, and prompted Beijing to condemn the move as outrageous and unprecedented. Both the yuan and shares in Hong Kong dropped.
“On the face of it, like the scale of the virus, this is a very serious development,” said Richard McGuire, head of rates strategy at Rabobank. “Sentiment has been knocked, but only modestly, given this further escalation of tensions between two of the world’s superpowers.”
President Trump this month dimmed hopes of a phase-two trade deal with China, saying the relationship between the two countries had been too badly damaged by the pandemic. China is considering retaliating against the Chinese operations of two European telecommunication-equipment manufacturers if the European Union follows the U.S. in barring Huawei Technologies from 5G networks, The Wall Street Journal reported this week.
Also contributing to the market’s mood, Senate Majority Leader Mitch McConnell said Tuesday that Congress is unlikely to pass a new fiscal stimulus bill quickly. The White House and Senate Republicans are struggling to bridge divisions on a payroll-tax cut, school funding and other issues.
Some of the giant technology companies that have driven much of the stock market’s recovery since March are also poised to report quarterly earnings on Wednesday. Investors will get fresh cues about the outlook for the sector when Microsoft, whose shares have risen 32% in 2020, reports results for its fourth quarter after the close of trading.
“For Microsoft, expectations are probably quite high,” said Hani Redha, a portfolio manager at PineBridge Investments. “There will be some sense of how well cloud [computing] in particular has fared.”
Also due to publish earnings Wednesday: Tesla. The electric-vehicle maker’s shares have soared in recent months, in part on increased expectations that it will report a fourth straight quarterly profit. That could qualify Tesla for inclusion in the S&P 500.
Before the bell in New York, shares in Snap dropped 7.5% after reporting slowing revenue growth in the second quarter. Semiconductor manufacturer Texas Instruments rose 1.2% premarket after reporting a rise in net income.
In a sign of continued caution among investors, the yield on 10-year Treasury notes dipped to 0.589%, from 0.606% Tuesday. The drop in yields suggests fund managers expect low interest rates, tepid inflation and weak growth.
“The bond market is much more pessimistic than the equity market, and I think the equity market is right,” said Patrik Lang, head of equity research at Swiss private bank Julius Baer. China’s quick economic recovery shows U.S. growth could also pick up quickly once coronavirus is under control, according to Mr. Lang.
Oil prices slipped ahead of data on the size of U.S. petroleum stockpiles from the Energy Department, which are expected to show that crude inventories fell last week. WTI futures, the benchmark for U.S. crude, fell 1.6% to $41.25 a barrel.
The rising tension between the U.S. and China weighed on markets overseas. The regional Stoxx Europe 600 index fell 1.1%.
A man walks past an electronic stock board showing Japan's Nikkei 225 index in Tokyo Wednesday.
Photo: Eugene Hoshiko/Associated PressThe offshore yuan reversed earlier gains to trade as low as 7.0164 per dollar, compared with its previous close of 6.974 per dollar. Hong Kong’s flagship Hang Seng Index dropped 2.3%. The mainland Chinese Shanghai Composite Index, which closes earlier, had gained 0.4%.
Ken Wong, a portfolio manager at Eastspring Investments, said the news “created a lot of uncertainty” and fueled the selloff.
—Xie Yu contributed to this article.
Write to Joe Wallace at Joe.Wallace@wsj.com
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