Hong Kong stocks close lower after the Federal Reserve flagged an increasing tariff-induced inflation risk for the economy while the conflict in the Middle East disrupted global oil supply.

The Hang Seng Index fell 2%, the Hang Seng Tech Index dropped 2.4%.

Laopu Gold fell 6%; Pop Mart fell 5%; Meituan, JD.com fell 4%; Kuaishou, XPeng fell 3%; Tencent, Alibaba, BYD fell 2%; Xiaomi fell 1.4%.

A flare-up of inflation is an overhang on global stocks, with the US still deadlocked in the tariff talks with most of its trading partners. A break-up in the negotiations means that American consumers will need to bear the rising costs of imported goods, fuelling inflationary pressure and forcing the Fed to be more hawkish on monetary policy. Higher borrowing costs would also trigger outflows from Asia to more high-yielding assets.

“Trade policy, fiscal policy, and unintended consequences of policies from the Trump administration are contributing to market volatility in the second half of this year,” said Tai Hui, a strategist at JPMorgan Asset Management in Hong Kong. “We continue to advocate for international diversification in equities and income generation from multiple sources, including corporate credits, Asian fixed income and option overlay strategies to manage volatilities.”