The squeeze on Asia

2018-07-11 19:00    Jingyi

While the duration may very well remain an uncertainty, the fundamentals certainly do not appear to warrant the reaction thus far. The question would be whether the cloud of negative sentiment could prolong to a degree that would tip the market over.

The triggers

The past few months had seen the US and key trading partners engage in various instances of trade disputes that only appears to be heating up of late. Of particular interest had been the trade skirmish between the US and China that had certainly been occupying headlines. Since the mid-June announcement from the Trump administration on the two-tranche implementation of a 25% tariff on a total of $50 billion worth of Chinese imports, we have seen Asian markets react rather unfavourably. The first tranche will be due on 6 July, likely to heat things up upon materialisation. Notably, things had also further taken a negative turn into late June with President Donald Trump threatening an additional 10% tariff on $200 billion worth of Chinese goods should the US be met with retaliation, rupturing market confidence across the globe.

While investors had long been accustomed to President Donald Trump’s Art of the Deal stylised negotiations, the recent spate of threats have seemingly taken a menacing turn, garnering the market’s attention. The uncertainty over the duration and the credibility of the threat had been the twin engines, wearing out equity markets. Even up till the point when we are penning this, the market is a sitting duck waiting for any potential announcement from the US on restricting investments, particularly from China, which could carry the US-China trade skirmish further along.

Over and above the overarching theme of geopolitical concerns, there certainly contains regional factors undermining the markets. Compared to the acceleration in growth momentum in the same time last year, Asia’s giant, China, have evidently seen its economic indicators slowing their pace. China’s stock markets have plunged into bear market territory into late June, the CSI 300 crumbling more than 20% from its January peak. Meanwhile, constrained by deleveraging efforts itself, the access to further ease monetary policy appears to be restricted. For China’s neighbours, particularly open economies such as that of South Korea and Singapore, it had not been a pretty picture as well as prices plunges past key moving averages. 

Waiting for the clouds to clear

Amid the uncertainty and the volatility that had become commonplace in recent sessions, the only panacea may simply be time, as the markets continue to wait out the trade storm. In trading the markets, the bearish trends for many Asian indices appear to have yet been fully exhausted. Chinese President Xi Jinping was reportedly holding a similar hard stance in recent rhetoric to officials and chief executives, spelling potential further room to fall for markets.

That being said, one look at fundamentals suggests that we have yet to see significant material changes to the growth outlook even if economists widely expect a slowdown in growth to take place for Asian markets into the second half of the year. The fear would be the derailment of this growth from the wearing out of consumer and business confidence over the US-China trade war among others. Do watch for the duration in which the current trade tension could last with any clearance of the air which could likely bring about a recovery that will be worth riding.

China 300

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