Markets May 07

Revived US-China tensions spook markets

US President Donald Trump 'watching closely' if Beijing increases purchases of US goods under the trade deal agreed in January

by Umesh Desai
Revived US-China tensions spook markets
People wearing masks walk by an electronic signboard showing stock market moves in Tokyo on May 7. Photo: AFP

(ATF) Investors are jittery about a resurgence in US-China tensions after US President Donald Trump said he was “watching closely” if Beijing would increase its US goods purchases under the trade deal while suggesting that China may or may not keep its end of the bargain.

US officials have suggested potentially disruptive proposals to reduce the US’s dependence on Chinese supply chains, particularly in the technology and healthcare sectors, while also hinting at a possibility of a new tariff flare-up.

“As we have learnt from the previous rounds of trade tension since 2018, any meaningful increases in tariffs would likely not only weigh on global trade growth but also cause a serious dent in corporate confidence and the investment outlook,” said Morgan Stanley said in a note.

“As it is, the Covid-19 shock has meant the global economy will see its deepest contraction in peace time since the Great Depression.”

Morgan Stanley said in the note investors should expect heightened rhetoric and fresh non-tariff action, and the situation is more likely than not to stop there, at least until the US election.

Japan’s Nikkei 225 eased 0.2% as traders returned from the holiday break. China’s mainland’s stock index the CSI300 benchmark was down 0.1% as the jitters were offset by a slight improvement in Purchasing Managers’ Index (PMI) numbers. The Caixin/ Markit services PMI rose to 44.4 in April from 43 in March, while the composite manufacturing and services PMI, edged up to 47.6 from 46.7 in March.

Hong Kong’s Hang Seng index benchmark was down 0.45%, while Australia’s S&P ASX 200 fell 0.56% and Korea’s Kospi index eased 0.18%.

Credit markets were also soft as the Asia IG index was 2 basis points (bps) wider at 121/123. Sovereign CDS have moved out by 2-3 bps.

Investors will monitor economic data due to be released during the day including China’s trade data and forex reserves, South Korean current account balances and US jobless claims. A Wednesday report showed US companies cut a record 20.2 million jobs in April and on Friday a US jobs report for April is expected to see a 21 million plunge in payrolls, according to a median forecast in a Bloomberg survey of economists calls.