Most Asian markets extended last week’s worldwide losses as investors fret that Donald Trump’s controversial tariffs on $60bn of Chinese goods will spark a trade war that would hammer the global economy.
The US move to impose levies, claiming China is breaching intellectual property rights, sparked a rout of equities across the world, while China warned it was “not afraid of a trade war”.
US Treasury Secretary Steve Mnuchin said at the weekend that Trump was not ready to back down but added that he had “very productive conversations” with Chinese officials on the issue.
Trump’s announcement came weeks after he unveiled tariffs on the import of steel and aluminium products as he presses on with his “America First” protectionist programme.
Beijing did not rule out cutting back its purchases of US Treasuries, which are crucial to keep the wheels of the world’s top economy greased.
China is the biggest buyer of Treasuries. Wall Street’s three main indexes tumbled for a second successive day on Friday, and Asian investors — who fled to the hills last week — continued to sell yesterday.
“How China escalates will determine the pace of play, but Chinese retaliation so far has been more genial than initially thought, and they have made efforts for a diplomatic solution,” said Stephen Innes, head of Asia-Pacific trading at OANDA.
“Although China is willing to negotiate and is likely to offer compromises, uncertainty and the fear of escalation will likely hold back market sentiment in the short run.”
Adding to the negative sentiment was news that Trump had installed a hardline hawk, John Bolton, as his national security adviser, stoking geopolitical worries.
Hong Kong slipped 0.1% in the afternoon and Shanghai finished 0.6% lower, while Sydney gave up 0.5%. Wellington, Singapore, Manila and Jakarta were also down.
However, Tokyo bounced back in late trade to end up 0.7% on bargain-buying, while Seoul climbed 0.8% as it emerged that South Korea and the United States have reached an understanding on revising their free-trade agreement and on steel tariffs.
“So far, the initial measures from Trump and China are relatively muted,” said James Cheo, senior investment strategist at Bank of Singapore. “It could be far worse. The bigger impact is whether it escalates.
China needs to calibrate its response carefully to cause some discomfort, but without provoking another round of retaliation. “The room for miscalculation seems to be high, both in terms of provoking Chinese retaliation or taking measures that end up hurting the US economy.
The hope is that there is rationality from both parties.” Fears of a trade war continue to weigh on the dollar, which was stuck below ¥105 — its lowest level since November 2016 when Trump was elected.
The weaker dollar sent oil prices surging Friday as it makes the commodity cheaper for anyone holding other currencies.
Adding upward pressure on oil was speculation that Bolton will press Trump to tear up the Iran nuclear deal, which could spark turmoil in the Middle East.
“Nothing like geopolitics to put a bid back into oil,” said Greg McKenna, chief market strategist at AxiTrader.
“And that is exactly what we’ve seen in recent days with John Bolton being appointed as the incoming NSA for President Trump.
Certainly, the administration has taken a decidedly hawkish tilt and a read through Bolton’s twitter feed supports his hawkish credentials.”
Both main contracts dipped in Asia yesterday on profit-taking.
China launched yuan-denominated oil futures contracts, marking the first time foreign investors will have access to the assets in the country as the world’s top crude importer seeks greater influence over global prices.
However, analysts said they are unlikely to challenge New York and London-based futures in the short-term owing to Chinese capital controls and the entrenched position of the dollar-denominated contracts.
In Tokyo, the Nikkei 225 closed up 0.7% at 20,766.10 points; Hong Kong — Hang Seng closed down 0.1% at 30,268.77 points and Shanghai — Composite fell 0.6% at 3,133.72 points yesterday.
People walk outside the Hong Kong Stock Exchange building. The Hang Seng closed down 0.1% to 30,268.77 points yesterday.
