Asia Open: Trump's reciprocal tariffs announcement rattles global markets

US tariff announcement were far more hawkish than expected

The announcement of US reciprocal tariffs came as a major shock, defying earlier expectations that the President would adopt a more measured "kind reciprocal" approach following the recent 25% tariffs on autos, steel and aluminium. Pre-announcement speculations pointed to a flat universal tariff in the 15-20% range, but the final outcome proved far more hawkish—while the universal tariff was set at 10%, many countries faced significantly steeper rates, which were out of market expectations.

China, in particular, was hit with an additional 34% tariff, bringing its total tariff burden to 64% when accounting for previous measures. Across Asia, India faced 26%, Vietnam 46%, Japan 24%, Thailand 36%, and Singapore 10%. The still-elevated tariffs suggest that prior efforts by trading partners to appease Trump had limited influence in securing meaningful reductions, indicating that any future negotiations for tariff relief will likely require substantially greater effort.

What’s next?

It is hard to believe that such broad-based tariff rates will not lead to higher consumer prices, and at a time where economic conditions are weakening, the focus seems set to turn more significantly from recession risks to stagflation concerns. This puts the Federal Reserve (Fed) in a difficult position, potentially facing the scenario of having to prioritise price stability at the risk of worsening the economic slowdown.

For now, the unexpectedly high tariffs are set to weigh on risk sentiment, with Japan’s Nikkei down 3%, ASX falling 1.6% and KOSPI declining 1.4% at the time of writing, where export-driven economies now face a tough trade-off for growth with the heightened trade restrictions Uncertainty will now linger over potential retaliation from affected countries, raising the question of whether trading partners will opt for diplomatic negotiations or hard countermeasures to mitigate the fallout.

The White House has made it clear that Trump will respond to any retaliation, signalling that counter-tariffs could escalate trade tensions further. As a result, trading partners are likely to tread cautiously, weighing the risks of a full-scale trade war. While the absence of head-on retaliation may help to offer some near-term stability, investors will want to see how countries may address the new tariffs with policy measures in order to see a meaningful recovery in risk appetite.

Gold: Record high on safe-haven flows

Near-term, the flock to safe-haven flows has lifted gold prices to yet another new record high, with prices inching closer to the US$3,200 level. The next stage of rally may likely hinge on retaliatory risks, with any escalation likely to see further lean into the safe-haven flows on increased uncertainties. For now, short-term technical conditions do point to overextended levels, which may suggest buying on dips as the lower-risk strategy. Near-term support may stand at the US$3,074 level, where a previous upper channel trendline stands.

Nikkei points to broader downward trend

The post-tariff dip has dragged the Nikkei down more than 3% in today’s session, marking a breakdown of a descending channel trendline. For now, its daily relative strength index (RSI) has struggled to cross back above its midline lately, suggesting sellers in control. The broader trend is likely to remain bearish, with the formation of lower highs and lower lows in place, alongside the breakdown of a months-long range. Ahead, the September 2024 low at the 35,000 level will now serve as a horizontal support-turned-resistance for buyers to overcome.

Hang Seng Tech Index to see retracement extend further

The Hang Seng Tech Index has also broken to a new lower low in today’s session, suggesting that there is room for the recent retracement to extend further potentially towards the 4,945 level. The cumulative impact of US tariffs on China has now reached 64%, which is in line with Trump’s earlier campaign promises of 60%, effectively dashing any hopes that the US President may adopt a softer approach with China.

We still see the primary trend pointing to the upside, with a primary trendline support on watch around the 4,710 level. But that will hinge on any form of policy measures from Chinese authorities to cushion the tariff impact, which may take some time to materialise. In the meantime, there is room for the retracement to extend, as sentiments recalibrate to greater growth risks from higher-than-expected US tariffs.