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Markets savaged as US-China tariff brinkmanship escalates
ASIAN stock markets skidded and the US dollar fell on Friday while gold rose, as the US and China continued to fuel fears of a long-drawn trade war with proposed trade tariffs against each other.
Analysts said the current market weakness could represent a good time to buy value stocks, though they warned that sentiment is likely to remain volatile until more details of the tariffs are unveiled and their impact becomes clearer.
For now, economists see the US tariffs on China having limited impact on China's growth; they also expect China to remain pragmatic in its response. Still, risks remain in further escalation of trade tensions.
Said Bank of Singapore head of investment strategy Eli Lee: "We see the Chinese carefully calibrating their responses to discourage further moves from the US, but the room for miscalculation seems considerable at this stage."
US President Donald Trump on Thursday signed a memorandum directing his administration to take a range of actions against China's "harmful and unfair practices of acquiring US technology". These include 25 per cent tariffs on Chinese technology products, such as those in aerospace, information and communication technology, and machinery.
The import of these products amounted to US$50-60 billion last year, representing 10 per cent of total US imports from China. The detailed list of targeted products will be announced in 15 days.
China, in response, is proposing to impose tariffs of 15-25 per cent on 128 products from the US, including wine and fresh fruit and, at a later stage, pork and recycled alumium products. These have an import value of US$3 billion, representing 2.3 per cent of total Chinese imports from US.
These first shots in a feared trade war between the US and China sent Asian stock markets into a sea of red. The benchmark Straits Times Index fell as much as 2.7 per cent in intra-day trading before recovering slightly to end the day at 3,421.39, down 2 per cent or 69.98 points.
The Hang Seng Index in Hong Kong slipped 2.45 per cent, Japan's Nikkei slumped 4.51 per cent, while the Shanghai Shenzhen CSI 300 Index was down 2.87 per cent.
The Singapore dollar initially fell against the greenback before rebounding to S$1.3157 per one US dollar at 6.30pm Singapore time, a level little changed from a day ago. Meanwhile, gold, a safe haven asset, rose 0.94 per cent to about US$1,342 an ounce.
Wall Street was calmer yesterday after the steep drop on Thursday, with the Dow opening over 100 points higher.
DBS chief economist Taimur Baig said macroeconomic models suggest that the US tariffs will pose no more than 0.1-0.2 per cent downside to China's GDP growth. Projections by other economists also fall within this range.
Said Mr Baig: "This may not seem very large at first glance, but we think considerable worry is warranted as many firms work with razor-thin margins, and, as the US president has indicated, this is by no means the last salvo in this saga."
Many believe that China will remain pragmatic in its response.
"China has already expressed a willingness to make concessions on market access without technology transfer, and the tariff announcement is not definitive, as the recent steel tariffs illustrate," said UBS Wealth Management global chief investment officer Mark Haefele. "Thus, we view this as the beginning of a long process towards an eventual resolution."
Citi Research also noted that Chinese retaliation has been "milder than feared" thus far, and that the Chinese have clearly stated a preference for resolving disputes via dialogue.
Still, "while we retain the view that China is willing to negotiate and is likely to offer concessions, uncertainty and the fear of escalation will likely hold back market sentiment in the short run", it said.
UBS Wealth Management regional chief investment officer Kelvin Tay sees Friday's market movements to be a knee-jerk reaction.
"(We) don't think this is the start of a bear market but a short-term pullback, as volatility increases due to the events that transpired overnight," he said. "For investors with a longer term investment horizon, this is a good opportunity to accumulate value stocks on any weakness."
Concurring, DBS market strategist Yeo Kee Yan noted that earnings forecasts have been revised upwards after the recent results season. "In other words, (the STI level) today is actually a good level to bargain on," he said. "That is provided that the trade war doesn't get worse. If it does, then bets are of course off. "
He expects some investors to also take the opportunity to switch into stocks driven by domestic factors, such as those in the residential property sector, as well as more defensive ones such as telcos, consumer staples and utilities.
In currencies, Citi Research said the Singapore dollar may be hurt as prospects of a trade war could cause the Monetary Authority of Singapore (MAS) to delay tightening its monetary policy.
Some also pointed out that the appointment of John Bolton as the next US national security adviser could raise uncertainty about geopolitical risks in the region, especially with regard to North Korea.
Said Daiwa in a note: "The big picture is that the US and China are now locked in a geopolitical contest. Whoever wins in this contest will determine the rules, norms and institutions that govern global economic and political order in the next few decades, as well as the levels of prosperity for these two countries.
"Here at Daiwa, we don't call it a trade war anymore. We call it 'great power rivalry'. And Asia is obviously caught right in-between."