All eyes on trade and risks this week
LAST week, the markets had a brief respite from trade and geopolitical tensions; all eyes will be on events this week as some risks may resurface.
Just as President Donald Trump tweeted that he may or may not attack Syria, the US, Britain and France launched missiles on Syria last Friday.
As Trump later declared it a “mission accomplished,” some are watching for any possible fallout.
In trade, Trump suddenly wanted to explore rejoining the TransPacific Partnership where members are cautious about making significant changes.
And just as Trump and President Xi Jinping came out with conciliatory words on trade, the White House is reportedly threatening to block Chinese technology investment in the US.
Possibly as early as this week, there could be details on further products to be targeted under US tariffs of 25% on US$100bil of imports from China.
Last month, US tariffs had been slapped on US$60bil of imports from China.
Following Xi’s promises to further open up China’s economy and lower tariffs on auto imports, Chinese Commerce Minstry spokesman Gao Feng warned of retaliation if the US were to escalate tension.
Saying that talks cannot commence “under the unilateral threat from the US”, Gao was reportedly saying that opening-up measures had nothing to do with ongoing trade conflicts.
A sensitive point is the US demand for removal of subsidies in industries under Made in China 2025.
“This is the main sticking point that may scuttle any chance of a compromise in the tariff tit-for-tat between the two countries,” according to Pong Teng Siew, head of research, Inter-Pacific Securities.
Patience in negotiations may not be a priority for “men in a hurry”.
“Being the world’s largest trading nation, China’s vision of Made in China 2025 requires it to observe market liberalisation, a level playing field and removal of subsidies or barriers that hamper competition.
“But these are likely to be conducted at its own pace, according to its economic and financial conditions,’’ says Lee Heng Guie, executive director, Socio Economic Research Center.
While the pressure is piling on, there are reports of a gradual yuan depreciation being considered, which will result in cheaper imports from China into the US.
A full-blown trade war may cause a 0.25% drop in US gross domestic product but the Fed is still expected to raise rates faster than expected. Can it do so?
“If the Fed assesses that the economy is strong enough, it will proceed with the guidance of three rate hikes,” says Lee.
“The Fed may raise rates four times this year, despite the trade spat between the US and China,’’ says Nor Zahidi Alias, chief economist, Malaysian Rating Corp.
History indicates that US monetary policy measures are quite closely aligned to stockmarket impact. “The impact on corporate profits can be gauged from stockmarket reaction.
“Many observers believe reverting to quantitative easing (flooding the markets with liquidity) may be the end game in this trade war, especially if China stops buying or begins to sell US Treasuries,” says Pong.
“This trade war should end soon and countries can refocus on global growth,” says Danny Wong, CEO, Areca Capital.
Besides global growth, the impact on currencies is being felt. Trade war issues will be “one of the reasons why the US dollar/ringgit exchange rate is looking above 4.00,” says Hor Kwok Wai, chief operating officer, global markets, Hong Leong Bank.
The ringgit will also be under watch for any possible impact as the Hong Kong Monetary Authority (HKMA) bought back the Hong Kong dollar last Thursday after it sank to HK$7.85, at the edge of its HK$7.75-HK$7.85 range against the US dollar.
“The HKMA may be forced to raise rates sharply; be careful of a possible contagion effect on the ringgit,” says Pong.
“Both the Singapore dollar and ringgit will more likely be driven by global US dollar moves against emerging market currencies.
“We still expect some US dollar strength, post elections, to bring the ringgit back above 4.00 to the US dollar,” says Hor.
In emerging markets which were considered safe havens, contrasting views may provide some action ahead.
While Morgan Stanley, in slashing year-end targets for seven benchmarks in the region, says to cash out of Asia, UBS Global Wealth Management expects a 12% jump in stocks outside Japan in anticipation of a negotiated trade settlement.
Overall, valuations for Asian equity markets are cheaper than those in the US.
“Price earnings ratios in Asia are 13 times compared with 17 times in the US,” says Thomas Yong, CEO, Fortress Capital. “But investors will likely stay cautious if volatility persists.’’