Trump's new tariff threat deals body blow to equities

TRADE risks returned to global markets on Monday, following US President Donald Trump's new tariff threats, prompting analysts to recommend profit-taking as the bull run may take a pause.

CMC Markets analyst Margaret Yang noted that markets have rallied for almost two months without a major correction, and valuations of global equities are rich.

"This trade war and the uncertainties that it brings serves as a good excuse for profit-taking activities," she told The Business Times, adding that the recent rallies in US equities and the Singapore market were "too good to be true".

Tan Min Lan, the Asia-Pacific head of UBS' Chief Investment Office, said this is a good time to rebalance Asian equity portfolios, and advised switching to high-quality or defensive segments such as Singapore equities, Asian large caps, Asian financials and stocks with high dividend yields.

Olivier d'Assier, head of applied research for the Asia-Pacific at Axioma Inc, does not expect the bull run to end just yet, as markets have become accustomed to Mr Trump's showmanship and realise that what is tweeted on Monday can be easily reversed on Wednesday.

"Investors are left wondering how much of this latest tweet is real, and how much is show... But as investors are sitting on some pretty nice returns year to date, why not put some away now and maybe come back later if a deal does get done?"

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The knee-jerk reaction to Mr Trump's threat to hike tariffs on US$200 billion of Chinese goods this Friday was particularly severe in markets in Singapore, China and Hong Kong. The Chinese offshore yuan closed at 6.7814 per dollar, down 0.6 per cent to levels near its lowest in the year to date.

The Shanghai Composite Index ended down 5.58 per cent to 2,906.46, and the Shenzhen Composite Index fell 7.38 per cent to 1,515.8.

Hong Kong's Hang Seng Index dropped 2.9 per cent to 29,209.82, while Singapore's Straits Times Index (STI) fell 3 per cent to 3,290.62.

In Australia, the ASX 200 closed 0.82 per cent lower to 6,283.73. Malaysia's Kuala Lumpur Composite Index edged down 0.27 per cent to 1,632.8.

Markets in Japan and South Korea were closed on Monday for public holidays.

In Europe, the DAX 30 in Germany dipped 1.3 per cent around 20 minutes after the opening bell; the Paris CAC was trading 1.5 per cent lower as well. The London Stock Exchange was closed for a bank holiday.

CMC Markets' Ms Yang noted that the sudden about-face took investors by surprise, because although markets have been pricing in trade tensions over the past few months, the expectation had been for a resolution, not a potential breakdown in talks.

A "Goldilocks" moment in US markets has also boosted optimism, as strong economic growth coincides with contained inflation. The Nasdaq Composite Index reached a new all-time high at the close last Friday, and the S&P 500 narrowly missed a record the same day.

Even the STI has rallied strongly, climbing 10.5 per cent since the start of 2019, before Monday's bloodshed erased a chunk of the gains.

Said Ms Yang: "Previously, people were looking for the trade negotiations to be completed by end of May or sometime in the middle of May. It's a 180-degree swing."

Jeffrey Halley, senior market analyst at Oanda, said that while some of Mr Trump's tariff threats have turned out to be empty in the past, he has not made such a threat lately.

"I think he's trying to push China to go back to its original stand. They seem to be playing hardball with China, and showing that they are prepared to go further on the tariff front if China won't play the game."

This new development prompted China's central bank to cut the reserve requirement ratios for small and medium-sized banks from May 15. Other central banks in the region could follow suit.

"The fates of most economies in South-east Asia are intrinsically twined with China," Mr Halley said.

"We may see central banks looking to loosen policy faster than expected if economic growth slows significantly because of the escalation."

The sentiment hit oil prices as well, with US crude dropping 3.1 per cent to its lowest in more than five weeks, and then recovering to US$61.49 per barrel, down 0.8 per cent. Brent crude was 0.4 per cent lower at US$70.57 per barrel.

Meanwhile, investors fled to the safe haven of gold, bumping spot gold prices up 0.1 per cent to US$1,279.20 per ounce.