Asian stocks and currencies took a sharp downturn on Monday morning following the US imposition of tariffs on imports from Canada, Mexico, and China, sparking fears of a potential global trade war. The move has heightened concerns about economic growth, risk aversion, and tighter US Federal Reserve policies.
Market reaction to tariffs
“Equity markets and currencies are selling off due to fears about growth, risk aversion, and expectations for tighter [US] Fed policy,” said Alex Holmes, regional director for Asia at the Economist Intelligence Unit in Singapore. Investors are recalibrating their expectations of US President Donald Trump’s actions, which appear more serious than initially anticipated.
Jason Lui, head of APAC equity and derivatives strategy at BNP Paribas in Hong Kong, noted that investors previously viewed Trump’s tariffs as a negotiation tactic. “It seems he’s a lot more serious than the market would have expected,” Lui remarked.
On Saturday, Trump signed executive orders imposing new tariffs: a 10% tax on goods from China and a 25% levy on imports from Mexico and Canada, effective Tuesday. In response, China announced it will file a lawsuit against the US at the World Trade Organization (WTO), while Mexico and Canada vowed retaliatory measures.
Economic impact and currency movements
The tariffs are expected to increase prices in the US, prompting the Federal Reserve to maintain interest rates steady. This scenario could lead to depreciation of Asian currencies against the dollar. While weaker currencies typically boost exports, the looming threat of a trade war raises concerns for Asia’s export-dependent economies.
The MSCI AC Asia Pacific Index, which tracks equities across the region including Japan, dropped nearly 3%. Taiwan’s benchmark TAIEX opened 4% lower on the first trading day after the Lunar New Year holidays, reflecting the impact of broader market sentiment. South Korea’s KOSPI fell by almost 3%.
Key tech companies were hit hard:
– Quanta Computer, a major supplier to Tesla and Nvidia, plummeted nearly 10%.
– Delta Electronics, a leading power supplies manufacturer, plunged nearly 9%.
– Foxconn and TSMC, critical suppliers to Nvidia and Apple, declined by 8% and 6%, respectively.
– SK Hynix shed around 6% before recovering slightly.
In Hong Kong, the Hang Seng Index and Hang Seng Tech Index opened lower, with declines deepening throughout the session. Bilibili, an online video streaming platform, fell over 7% at one point.
The FTSE China A50 Index Futures, a barometer of foreign investor sentiment toward mainland markets, dropped 2.2% at the open. China’s A-share market remains closed for the holidays and will resume trading on Wednesday.
Japan’s Nikkei Stock Average and Tokyo Stock Price Index both slid more than 2% during morning trading.
Currency fluctuations
A stronger dollar pushed Asian currencies downward. Shoki Omori, global chief desk strategist at Mizuho Securities, noted, “Two-year Treasuries are rallying, making the dollar king while other currencies are being sold.” Yields on 2-year Treasury notes rose to 4.2510%, raising investor expectations that US policymakers will keep interest rates on hold.
The Japanese yen strengthened briefly to the mid-154 level but later depreciated 0.69% to 155.72 against the dollar by 10:55 am. The offshore Chinese yuan weakened to 7.3680 before rebounding slightly. Meanwhile, the onshore yuan market, which trades within a range set by the People’s Bank of China, remains closed for the holidays.
Outlook and analyst views
Goldman Sachs noted in a report that China’s response to the US tariffs has been “relatively restrained so far,” though strategists remain cautious about potential escalations post-holidays. Economist Intelligence Unit’s Holmes emphasised the importance of monitoring the permanence of US tariffs and any communication from policymakers.
Holmes added that Asian central banks may allow their currencies to weaken modestly to offset tariff impacts, given favourable domestic conditions such as low inflation. However, the long-term trajectory of this trade conflict will continue to shape market sentiment and economic prospects globally.
As uncertainty lingers, investors brace for further volatility amid escalating tensions between the world’s largest economies.
Source; Nikkei Asia
