Asia markets shrug off trade war fears, with Singapore shares flat

Singapore port and Sentosa islandSingapore port and Sentosa island

Singapore shares were flat in late morning trade on Thursday, as markets around the region appear to have largely shrugged off the latest escalation of the U.S. trade war with China.

Overly pessimistic positioning and tariffs at the lower end of what was proposed partly explain this. However, much of it could also be a ‘clear the air reaction to the passing of a risk event and the possibility of negotiations continuing despite the escalation,” Bank of America-Merrill Lynch said in a note on Wednesday, U.S. time.

The announcements are perceived to have reduced the risk of further immediate tariffs as well as opening a period during which the U.S. and China can negotiate,” it added. 

Singapore’s Straits Times Index was largely flat, down just 0.001 percent at 3176.54 at 11:14 A.M. SGT.

Among other regional markets, South Korea’s Kospi was up 0.92 percent, the Nikkei 225 was flat, Thailand’s SET index was up 0.51 percent and Hong Kong’s Hang Seng Index was up 0.11 percent.

In Singapore, the heavyweight banks were helping to support the index, with DBS up 0.12 percent, OCBC up 0.27 percent and UOB up 0.38 percent at 11:31 A.M. SGT.

The dollar has also weakened, which may help to bolster emerging markets which were recently pressured by greenback strength.

The U.S. dollar index, which measures the greenback against a basket of currencies, was at 94.47 at 11:29 A.M. SGT, off levels as high as 94.71 on Wednesday, according to ICE futures data.

Trade war ramps up

That was despite the ramp up in the trade war.

U.S. President Trump escalated his trade war on China on Monday U.S. time, with plans to impose 10 percent tariffs on US$200 billion worth of imports from China and warned that if China retaliates, he will impose further tariffs on another US$267 billion in imports, effectively all of China’s goods exports to the U.S. The tariffs will start on 24 September and will rise to 25 percent by the end of the year, Reuters reported, citing a senior administration official.

China on Tuesday put retaliatory tariffs on US$60 billion of products imported from the U.S., with the measures also taking effect on 24 September.

But analysts were relatively sanguine about the impact, suggesting that the Trump administration may not have the power to administer much pain to the global economy with its belligerent trade moves.

Limited US impact

The direct impact of the latest round of tariffs on the [U.S.] economy is likely to be minimal. U.S. corporations will have to cope with higher costs which may weigh on production, slowing an otherwise solid trajectory for investment,” Bank of America-Merrill Lynch said in a separate note earlier this week. 

BofA-ML added that passing on some of the costs to consumers may pressure inflation on goods, but it estimated that at US$20 billion tariff tax would reduce U.S. disposable income by only 0.12 percent, with the bulk of the effect showing in the first quarter of next year.

When it comes to China, even relatively bearish analysts didn’t expect too much of an impact, and they noted that efforts to negotiate would likely dial back trade tensions.

Offsets in China

“The likelihood of de-escalation will rise over time, as the increasing economic impact in the U.S. will make the Trump team less combative and China realizes that it will be hard to integrate more fully in the global economy without some concessions regarding its specific economic model,” Louis Kuijs, head of Asia economics at Oxford Economics, said in a note earlier this week.

He noted, however, that Oxford Economics’ baseline economic growth forecast for China in 2019 would fall to 5.8 percent, even if policymakers there offset around half the impact by taking further measures to support domestic demand growth.

The case for China trying to please the U.S. with concessions currently isn’t strong, he added, noting a “major gap” in negotiation positions. “Moreover, it is not clear what the Trump administration’s critical demands are,” Kuijs said.

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