Asia Markets: US-China Trade War, US-Iran Tensions, Currencies in Focus.

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Stocks on Tuesday in Asia decelerated in the afternoon trade, while investors looked forward to a meeting between Donald Trump and the Chinese President Xi Jinping set to happen later this week.

Mainland Chinese stocks commenced the decline as their stocks slipped by the end of the morning session: The Shanghai composite shed 1.82% and Shenzhen component fell 2.12%. The Shenzhen composite also dropped 2.04%. In Hong Kong, the Hang Seng index slipped 1.31%.

China-listed bank shares shattered between the concerns over lending too much to small firms, which could be vulnerable to an economic slowdown. Bank of Communications dropped 3.02% and China Construction Bank fell 2.15%. Their Hong Kong-listed counterparts shed 4.03% and 0.91%, respectively.

The Nikkei 225 in Japan slipped 0.44% in afternoon trade and the Topix shed earlier gains to decline 0.24%.

Over in South Korea, the Kospi was 0.15% lower, while Australia’s S&P/ASX 200 shed 0.12%.

Japanese currency Yen, widely viewed as a safe currency, traded at 106.90 against the dollar after touching lows around 107.5 yesterday. The Australian dollar changed hands at $0.6960 after rising from levels below $0.695 in the previous session.

Awaited meeting of Trump-Xi

Investors desperately wait for the much-anticipated meet of Xi and Trump in the upcoming G-20 summit in Japan. The two leaders are likely to discuss the protracted trade war between their two countries.

China and the US have imposed heavy tariffs on billions of dollars worth of imports since the last year. This year, in May, the two economic powers increased tariffs on some other goods. Trump also threatened to impose tariffs on the remaining goods if the two countries don’t come to a deal.

China’s Ministry of Commerce said in a statement on Tuesday that China’s Vice Premier Liu He had a phone call with U.S. Treasury Secretary Steven Mnuchin and U.S. Trade Representative Robert Lighthizer on Monday. According to the statement, the two parties discussed trade and agreed to keep communications.

Overnight on Wall Street, the Dow Jones Industrial Average closed 8.41 points higher at 26,727.54, while the S&P 500 declined 0.2% to finish its trading day stateside at 2,945.35. The Nasdaq Composite closed 0.3% lower at 8,005.70.

There appeared to be a “consensus building” in the U.S. markets that Trump and Xi are set to “agree to not only resume talks but hold off on tariffs for a defined amount of time,” according to Hannah Anderson, a global market strategist at J.P. Morgan Asset Management.

She, however, sounded a note of caution stating: “I think that might be getting a little bit ahead of where negotiations are likely to come out.”

The potential U.S.-China developments come as expectations have risen for an interest rate cut from the U.S. Federal Reserve. The central bank opened the door to that possibility last week.

“A July cut is very likely, whether there (is) a truce or not. I think the key difference that a truce means for the Fed is that if there is a truce, it could be one cut. It could be a 25 basis point cut. If there is actually no truce, it could be a 50 basis point cut,” Tan Teck Leng, Asia Pacific foreign exchange analyst at UBS Global Wealth Management, said on Tuesday.

The U.S. dollar index, which tracks the greenback against a basket of its peers, last traded at 95.901 as it continued to slide from levels above 97.2 seen last week.

Tan, for his part, said the dollar is “already in a structural drift lower” for the next six to 12 months.

“Even if the Fed doesn’t cut as much as market expectations in July, the fact is that the economy is slowing very sharply,” he said. “This year, the U.S. GDP is growing at about 2.8 to 3%, next year we are looking at 2% of GDP growth. So, it is a tremendous slowdown.”

“Even if the Fed might be cutting once or twice, we can’t rule out that, going into next year, they might actually need to ease more than that. So, that is the context where the dollar index could easily go below 95,” the analyst said.

Tensions between Iran and the US

Markets are also keeping a constant eye on the developments between the US and Iran after the US imposed sanctions on Iran as a consequence of Iran shooting down an unmanned American spy drone. Tensions between the countries have been on a peak since the recent attack on the oil tankers in the Strait of Hormuz, which led to the price hike of crude.

The latest sanctions by Washington on Tehran “appear to be more gloss than substance” given that the current restrictions are “already very harsh,” Tapas Strickland, markets strategist at National Australia Bank, wrote in a note.

Oil prices were lower in the afternoon of Asian trading hours, with the international benchmark Brent crude futures contract slipping 0.59% to $64.48 per barrel. U.S crude futures were 0.83% lower at $57.42 per barrel.

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