Markets appear to be holding on to hope that US-China trade negotiations will not be derailed, amid reports that this week’s trade talks in Washington will still take place. Such a positive interpretation of recent events helped the Dow recover most of its losses before ending 0.25 percent lower, while the S&P 500 fell 0.45 percent on Monday. Stock markets in China, Singapore, and Australia steadied on Tuesday, although Japan’s Nikkei 225 and South Korea’s KOSPI came back from their respective holidays to trade lower by over one percent respectively as both played catch up to the previous day’s selloff across the region.
Currency markets also continue to digest the prospect of higher US tariffs on Chinese imports as soon as Friday, as tweeted by President Donald Trump, with emerging market currencies like the Chinese yuan, South Korean won, and the Indonesian rupiah extending their declines against the US dollar. Meanwhile, safe haven assets such as the Japanese yen and Gold are holding on to Monday’s gains.
US-China trade tensions are set to be at the forefront of the market’s collective mind this week, as the slightest development or headline stemming from discussions in Washington could trigger knee-jerk moves by traders and investors. Amid such highly sensitive market conditions, volatility is expected to be the order of the day. Should the existing 10 percent US tariffs on some $200 billion worth of Chinese goods indeed be hiked to 25 percent come Friday, that may trigger another selloff in riskier assets, as investors try and anticipate what higher barriers to trade may do for the already moderating global growth outlook.
Central banks in focus amid trade tensions flare-up
Given renewed concerns over trade ties between the world’s two largest economies, attention will also turn to central banks that have previously highlighted external downside risks while adopting a dovish bias. The central banks of Australia, New Zealand and Malaysia are all expected to make their respective monetary policy decisions this week.
With US-China trade tensions having already weighed on the global economy, some of these central banks may opt for a pre-emptive rate cut, which could, in turn, put more downward pressure on their respective currencies. Amid continued US dollar resilience at this point in time, emerging market currencies may find it tough to carve out gains in the near-term, as risk-off sentiment also continues to cast a cloud over regional assets.
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