Markets May 04

US-China tensions rattle markets

Speculation that President Trump may block a government fund from investing in China equities, plus comments by Pompeo on the origin of the coronavirus heightened trade concerns 

US-China tensions rattle markets
A homeless man sleeps under an umbrella on a sidewalk in Bangkok's Chinatown on April 27, 2020. Pic: Mladen Antonov, AFP

(ATF) Asian markets fell in early deals on Monday amid rising tensions between the world’s two largest economies. A report said US President Donald Trump may block a government retirement fund from investing in Chinese equities on grounds of national security, while US Secretary of State Mike Pompeo said on Sunday "enormous evidence" showed the new coronavirus originated in a lab in China.

The market moves were exaggerated in thin trade as China and Japan are on holiday.

"Comments from the US' Mike Pompeo about the origin of the coronavirus together with a suggestion from President Trump that he will impose tariffs on China because of the outbreak are not helping risk sentiment,” said Robert Carnell, regional head of research Asia Pacific at ING Bank.

The Hong Kong benchmark, the Hang Seng index, plummeted 3.6% as trading resumed following Friday’s holiday closure when Financial Secretary Paul Chan said that GDP will contract 4-7% in the current year.

A Moody’s Analytics forecast said Hong Kong’s GDP is expected to contract by 6.5% y/y in the March quarter, from a 2.9% decline in the December quarter.

“The dismal projection for Hong Kong’s growth is due to a larger than expected impact from the Covid-19 outbreak. While the economy has been successful in containing the localized spread, exports and travel and tourism have suffered significant setbacks, which, combined with the persistent issue of social unrest and weakened consumer confidence, are expected to deepen the slowdown seen through 2019,” Moody’s Analytics said in a note.

The Australian S&P ASX 200 rose 1% driven by healthcare and technology sectors even though oil prices edged lower. The overall mood remains sombre after Wall Street’s weak finish last week.

On Friday the Dow Jones fell 2.6%, the S&P 500 dropped 2.8%, and the Nasdaq index tumbled 3.2%. 

Korea’s Kospi tumbled 1.84% and the won weakened to 1230 to a dollar after North and South Korean troops fired at each other in the demilitarized zone that divides the two countries, in a rare exchange of fire. The two neighbours remain technically at war, after fighting in the Korean War was halted with an armistice in 1953 and the last time the two sides exchanged fire on the border was in 2014.

Credit markets are trading with a defensive tone. The Asia IG series 33 index has widened 5 basis points (bps) to 122/124 bps and China underperforming, having moved out 4 bps to 50/52. South Korea CDS has widened 2 bps to 37/39 bps.