TOKYO/HONG KONG/SINGAPORE — Asian financial markets are gripped by a chain of uncertainties brought on by former U.S. President Donald Trump’s return to the White House.
Trump, who has said “tariff” is the “most beautiful word in the dictionary,” has threatened as much as 20% tariffs on all imports and 60% on those from China, even as economists warned such a measure would hurt U.S. and global growth.
This time Trump won the electoral vote, and his Republicans took the Senate. If Republicans also win the House, Trump will have no obstacles to executing his campaign pledges.
Asian financial markets got a taste of how they might fare under a second Trump presidency. On Wednesday, the region’s currencies depreciated as the 10-year U.S. Treasury yield shot up on Trump’s victory.
The returning president’s proposed tariffs and loose fiscal policy are expected to send U.S. inflation higher, leading to fewer rate cuts and a stronger dollar. Although the U.S. reduced rates to a range of 4.5% to 4.75% two days after Trump’s electoral victory, the president-elect has been critical of Fed Chair Jerome Powell since his first term in office.
Colin Purdie, global chief investment officer at Manulife Asset Management, told reporters on Thursday in Hong Kong that markets were caught up by Republicans nearing a White House-Senate-House trifecta.
“There was an unexpected result in the sense of the [potential Republican] clean sweep,” Purdie said. “The markets weren’t necessarily expecting that outcome, and have had to pivot quite quickly to embrace the new reality.”
He was referring to market volatility after the election results.
China’s currency will likely be among Asia’s worst performers due to the potential tariffs, strategists say.
“The Chinese renminbi is likely to underperform other major currencies at least in the next six months, or as long as one year,” said Kiyong Seong, lead Asia macro strategist at French bank Societe Generale, using another name for the yuan.
Indicative of the Chinese currency weakening since Trump’s reelection, China’s central bank on Thursday set the onshore yuan’s midpoint at the lowest mark in about a year at 7.1659 to the dollar, although on Friday it set the midpoint at a stronger level. The onshore yuan is allowed to move 2% above or below the midpoint.
Barclays sees the South Korean won, Thai baht and yuan as the most vulnerable to Trump’s victory in the coming weeks, according to a note by Mitul Kotecha, the bank’s head of foreign exchange and emerging markets macro strategy for Asia. The won and baht have considerable trade and tourism linkages to China, Kotecha said.
“We would expect more pressure on short-term rates and weaker currencies to result in markets paring back easing expectations across Asia,” he said.
In Japan, where the central bank is tightening monetary policy, a weaker currency is expected to help ensure that the central bank lifts rates again next month, according to Nomura Securities.
After Trump’s victory, Japan’s top currency diplomat and the heads of the Indonesian and Malaysian central banks resumed jawboning against excessive market swings.
Emerging market debt instruments, including Asian bonds, will be under pressure due to Trump’s reelection, said Michael Strobaek, chief investment officer at Lombard Odier in a webinar on Wednesday.
If the dollar stays stronger for longer and rates are contained on the downside, the market “will start reversing some of the flows [into emerging market debt] that we saw originally because of the Fed cuts,” he said.
Societe General’s Seong said Indian and Indonesian government bonds could be “insulated from the U.S. election risk.” Indian government bonds are sensitive to oil prices, so Trump’s support for oil production could put downward pressure on the price of the commodity, ultimately helping India control inflation.
As for stocks, investors cite Beijing’s upcoming stimulus package as being a key consideration before jumping back into China and Hong Kong.
On Friday, Beijing unveiled a 6 trillion yuan ($836 billion) new debt issuance quota for local governments to deal with hidden debt in the following two years, bringing the total value of the program to 10 trillion yuan. However, there are no additional policies on stimulating consumption or addressing the property market. The package has been criticized by some as insufficient.
Southeast Asian equities could edge higher as companies further benefit from U.S.-China trade tensions, according to analysts. China has increased exposure to Southeast Asia to circumvent U.S. trade restrictions.
“Amid a reorganization of U.S. foreign policy objectives, China could invest more into ASEAN,” said Jayden Vantarakis, head of ASEAN research at Macquarie Capital. He said China has favored investing in energy, mining, transport and logistics over the past decade.
Loong Chee Wei, head of research at Malaysia’s Affin Hwang Investment Bank, said if the U.S. levies 60% tariffs on China, this “would favor Malaysia” thanks to its developed electronics and semiconductor sectors.
The bank said it is keeping its overweight call on Malaysian equities. Its year-end target for the FTSE Bursa Malaysia KLCI, the country’s major index of 30 large stocks, stands at 1,730 compared to Friday’s closing of 1,621.24 points.
In Japan, another Trump term would “bode well” for domestic equities in the very near term, said Kei Okamura, portfolio manager at Neuberger Berman. The country’s exporter stocks tend to get a boost from a weak currency.
Going forward, there is uncertainty about whether Trump, ever the businessman, will follow through with his proposed tariffs and policies.
“Until we get visibility about his cabinet over the next 90 days or so,” Okamura said, “it’s going to be pretty hard to know.”
source : asia.nikkei