Asia market morning update - trade retaliation

Further escalation?

On hindsight, there had perhaps been no better time for President Donald Trump to take up this challenge to secure what would be considered a winning deal in US-China trade. This is with the equity market rally seen since the start of 2019, the relatively resilient growth compared to various other trading partners and the central bank’s patience in sight. This may also be one reason to keep the President going until the stock market shout to tap out of this brawl or if a resolution is seen prior to the heating up of the campaign season. From the level of pullback, at approximately 4.6% currently from the May peak, we may perhaps still be far from that. As such, the potential for further escalation from the US end sustains.

As far as the US’ move on Monday releasing a list of about $300 billion worth of Chinese goods for further tariffs suggests, the US is not giving up yet. Whether the US will implement further tariffs remains to be seen, but there may be little question that this threat could be waved around in the meantime to dent the markets further, particularly given its potential to theoretically tip growth over. In the new age of more confrontational policy, likewise will be a test for China’s current leaders to display that they will be able to defend China’s ‘core interests’.

Trading further escalations

The important question moving ahead with the expectation for further escalations would be the impact for markets. This theoretical expectation for tariffs to hurt economic growth creates a bearish bias for equity markets as it is a bullish bias for defensive and haven assets.

Based on the indication from the S&P 500 index’s put-to-call ratio, we have finally seen a substantial pick-up in protection buying. This is also still a distance away from the levels seen into end-2018, reflecting that there is room on the downside for prices to go. The S&P 500 index itself had been engaged in a short-term downtrend with the key 200-DMA coming into view if we do have the 2800 handle defeated. A period of consolidation should be not ruled out with the stalemate, but the bias is on the downside.

Of FX, one pair we had highlighted in our note to watch yesterday would be CNH/JPY given the respective expectations to move amid the break out of the trade tensions. Prices can now be seen near the key support of $15.74 which had held prices previously in mid-2017 and the start of 2019. While the entrance into oversold territory creates room for a reversal at present, the due damage that trade tensions could do to the Chinese economy could see speculative selling for offshore yuan as the market continue to seek out safety with the yen. Any firm break here of the support level could see to extensions on the downside.

Asia open

The Dow’s worst one-day drop since January on Monday should prelude us to another bloodbath expected for Asia markets. As it is, early movers in the region including the ASX 200 and the Nikkei 225 had reflected this with a 1.4% and 1.8% drop respectively. Hong Kong market is expected to return today in this light data day to reflect the steep fall, catching up to the gloomy picture from the start of the week. As with the local Straits Times Index, both could see to their 200-DMA coming into the picture. One should watch the STI, in particular, as the 3200 handle may be given up ahead of the 3177 strong support that could see stops triggered.

Yesterday: S&P 500 -2.41%; DJIA -2.38%; DAX -1.52%; FTSE -0.55%