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Asian markets plunge on tariff fears

REGIONAL markets plunged on Monday after US President Donald Trump threatened to hike tariffs on US$200 billion worth of Chinese goods if a deal is not reached by Friday.

The sudden about-face took investors by surprise, said CMC Markets analyst Margaret Yang. While markets have priced in trade tensions over the past few months, the expectation was for a resolution, not for a potential breakdown in talks.

"Previously, people were looking for the trade negotiations to be completed by end of May or sometime in the middle of May. It's a 180 degree swing," Ms Yang said.

Olivier d'Assier, head of applied research for Asia-Pacific at Axioma Inc, added: "What gave investors their enthusiasm year to date was the fact that both sides were talking to each other, until that tweet.  Now there are talks of the Chinese cancelling their US trip, so we would be back to having both sides not talking, which is clearly unnerving for markets."

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Jeffrey Halley, senior market analyst at Oanda, told The Business Times that while some of these threats have turned out to be empty in the past, Mr Trump has not made a threat like this recently.

"I think he's trying to push China to go back to its original stand," said Mr Halley. "They seem to be playing hardball with China, and showing that they are prepared to go further on the tariff front if China won't play the game."

Andrew Tilton, chief Asia-Pacific economist at Goldman Sachs Group Inc, said on Bloomberg Television that market participants had put trade aside of late.

"Market pricing assumed there would be some kind of a deal, and no further escalation in tariffs. And meanwhile the growth outlook was actually improving," Mr Tilton said.

"This raises the spectre of a significant hit to growth should these tariffs escalate and should the uncertainty associated with that weigh on investment going forward."

A marked escalation in the trade war would have deep ramifications for Asia, Mr Halley added.

"The fates of most economies in South-east Asia are intrinsically twined with China. For example, China buys a lot of commodity exports from Indonesia and Malaysia. We could see emerging markets move quite a lot lower on this."

"We may see central banks looking to loosen policy faster than expected if economic growth slows significantly because of the escalation."

In the short term, this spells more bad news than good for the current bull market, said CMC Markets' Ms Yang. She noted that markets have rallied for almost two months now, with no major correction, so the uncertainties increase the chances of profit taking and further selloffs in May and June.

However, this could be a technical correction of 10 to 20 per cent, and the mid to long-term prospects depend more on whether the US market rallies afterwards.

"US markets still can go up higher after this short-term correction, because the fundamentals of the US market are still strong, the job market is very tight and US tech companies are still highly profitable," said Ms Yang.

"Also, Trump is preparing for more infrastructure building in America. That can drive the long-term growth of US markets."

Markets have become accustomed to Mr Trump's showmanship and realise that what is tweeted on Monday can be easily reversed on Wednesday, Axioma's Mr d'Assier said.

"Investors are left wondering how much of this latest tweet is real, and how much is show... But as investors are sitting on some pretty nice returns year to date, why not put some away now and maybe come back later if a deal does get done."

Key indices in Asia closed the morning session lower. The Shanghai Composite Index ended down 5.19 per cent at 2,918.65, and the Shenzhen Composite Index lost 5.22 per cent to 1,540.71.

Hong Kong's Hang Seng Index dived 3.3 per cent to 29,088.41, while Singapore's Straits Times Index plunged 3.57 per cent to 3,271.07.

In Australia, the ASX 200 was down 1  per cent to 6,273.6 at 12.04pm. Malaysia's Kuala Lumpur Composite Index edged down 0.7 per cent to 1,626.60.

Markets in Japan and South Korea are closed on Monday for public holidays.

The Chinese offshore yuan weakened to 6.8217 per dollar before paring losses to 6.7986 at 12.40pm. The onshore yuan fell to 6.7980 per dollar before recovering to 6.7830.

Prices of gold, the traditional safe-haven investment when markets experience turmoil, rose 1.2 per cent to a high of US$1,285.68 per ounce, then retreated slightly to US$1,283.16 as at 12.40pm.