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Asia stocks bleed as US, China drop the gloves
ASIAN stock markets plunged into the red on Monday, as the tit-for-tat tariff war between the world's two largest economies fired up anew, pushing a truce even further away.
The dimming outlook proved alarming enough for UBS, the world's largest wealth manager, to underweight stocks for the first time since the euro zone debt crisis.
The major Asian equity gauges suffered drops of more than 1 per cent on Monday, carrying through on last Friday's rout on Wall Street, even as the US and China each slapped tariffs on the other's exports and threatened to cut the other off from trade and investments.
US President Donald Trump's threat that he could declare the trade war a national emergency and order American companies to stop doing business with China also sent the Chinese yuan to a 11-year low.
Japan's Nikkei 225 was the biggest loser, falling 2.2 per cent; the broader Topix shed 1.6 per cent, wiping out all its gains for the year.
It was the same for Singapore's Straits Times Index (STI), which closed 1.5 per cent lower; it is in the red for the year by 0.1 per cent.
Hong Kong's Hang Seng, which at one point was down 3.6 per cent, slumped 1.9 per cent at the close, while the Shanghai Composite finished 1.2 per cent lower.
Key indices in Taiwan, South Korea and Australia fell between 1.3 and 1.7 per cent.
Most gauges seemed to have eased up a tad at their respective closes from their intra-day maniacal sell-off, following China's vice premier and top negotiator Liu He's call for a calm resolution to the trade war.
A big beneficiary from the markets' "risk-off" mode was gold. The yellow metal seems destined to scale US$1,600 an ounce.
Its fellow safe-haven asset, the Japanese yen, is charting a fresh high for the year against the greenback, having slipped below the psychologicial 105.00 mark.
Some analysts view the latest tariff goings-on as noise and drama, par for the course when hard-negotiating tactics are in play. They say that a resolution, though probably some way off, should not be ruled out.
Jefferies said in a note: "We continue to believe that the drama is textbook Art of the Deal negotiation style, and that some sort of deal is more likely than not."
But others, like research outfit Oxford Economics Research, still worry: "The impact of the new tariffs on China's economic growth will be sizeable. Even assuming some offset from more policy support, we now expect China's GDP growth to fall significantly below 6 per cent in 2020."
Mark Haefele, global chief investment officer at UBS, saying the escalating US-China trade feud has raised downside risks for the global economy and markets, said the private bank was tamping down portfolio risk by going underweight on stocks to lower its exposure to political uncertainty. It is the first time that UBS has gone underweight on equities since 2011's euro zone crisis, but it cautioned investors against large equity underweights that make them look as if they are preparing for the next great financial crisis.
The latest US tariffs are deemed more damaging as they cover consumer goods and hence could hurt US consumer spending and slow down the country's economy even more.
China's import demand for intermediate and consumption goods from its neighbouring economies will also slump further, exerting growth pressures around the region, warned Allianz Global Investors Asia-Pacific senior economist Christiaan Tuntono.
The trade feud has already taken a toll on the global economy. Manufacturing purchasing managers' indices (PMIs) across the world have contracted; a plunge in exports has driven Europe's largest economy, Germany, to shrink in the second quarter.
Other factors, chiefly the UK's Brexit, the prolonged protests in Hong Kong, Italy's political turmoil and geopolitical rifts in the Middle East - while all being political - will probably lead to significant economic burden, said FXTM chief market strategist Hussein Sayed.
UBS' Mr Haefele said: "We will be on the alert for signs that the recession in the global manufacturing sector is spreading to services and consumer spending."
He added, however, that while the house expects a period of below-trend growth, a US recession is unlikely in 2020, thanks to the additional easing by the Federal Reserve and strong consumer spending.
There are two key events on the horizon in relation to the US-China trade skirmish: First, the market will be watching whether the US and Chinese delegations will meet face-to-face in September.
Second, the Asia-Pacific Economic Cooperation (Apec) Leaders' Meeting, slated for November in Chile, where all eyes will be on whether the leaders of the two sides will defuse the tension.
OANDA's senior market analyst Edward Moya said: "Financial markets will likely remain nervous, and we could see an additional threat from President Trump. With recession concerns being so elevated and the election just over a year away, he might do a lot of posturing in the coming weeks, but markets may be sceptical that he would follow through on these additional threats."