By Jamie McGeever
(Reuters) – A look at the day ahead in Asian markets.
Asia kicks off what is likely to be a volatile day in global markets on Monday after President Donald Trump followed through on his threat to hit Mexico, Canada and China with tariffs on imports into the United States.
It will be fascinating to see how investors react to something they have known was coming and which is almost universally seen as damaging for economic growth and financial assets. They won’t be surprised, but they will still be shocked.
A wave of ‘risk off’ sentiment sweeping over markets would bode ill for Asia, although Japanese government bonds might fare better.
Australian, Japanese and South Korean stock futures all pointed to lower opens on Monday, and bitcoin was last down 3%. The U.S. dollar is firmer across the board, leaping to a 22-year high against the Canadian dollar and dragging the euro closer to parity.
Gold is poised to push to new record highs, but U.S. Treasuries may be caught between the whoosh of safe-haven demand and worries about the inflationary effect of the tariffs.
The White House said the 25% duties on imports from Mexico and Canada, and 10% levy on Chinese goods, will come into effect February 2. It is unclear how long they will remain in place or what will see them lifted.
Canada has already retaliated, so all eyes are now on how China responds when the country reopens after the Lunar New Year holidays. An early indication of Beijing’s intent and scale of market pressure could be the yuan’s next fixing – it was last fixed on Jan. 27 at 7.17 per dollar, around its strongest in two and a half months.
Investors have broadly cheered Trump’s agenda, betting that slashing taxes, government spending and regulation will juice the U.S. economy and stock markets. But most think his immigration and trade policies will hamper growth.
The tariffs on Mexico and Canada are particularly galling to many observers as these are two of America’s strongest allies. The total duties coming into effect on Tuesday are on $1.3 trillion of goods, over 40% of all U.S. imports, and around three times the volume – mainly from China – targeted in his first presidency.
Deutsche Bank’s George Saravelos says investors must “structurally and significantly” reprice the trade war risk premium, and analysts at Capital Economics warn that Canada and Mexico could plunge into recession, and U.S. inflation is going to rise sharply and quickly. If so, “the window for the Fed to resume cutting interest rates at any point over the next 12 to 18 months just slammed shut.”
A more hawkish Fed and tighter U.S. monetary policy would be bad news for Asia and emerging markets. Time to buckle up.
Here are key developments that could provide more direction to markets on Monday:
– Reaction to U.S. tariffs
– China “unofficial” manufacturing PMI (January)
– Indonesia inflation (January)
(By Jamie McGeever; Editing by Diane Craft)
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