Trade Wars and the Fed Dampen Mood in Asia

The trade spat between the world’s two largest economies — China and the United States — is imperiling the entire Asia-Pacific, regional finance ministers have warned.

In a statement, finance ministers meeting in Port Moresby said risks to the global economy had increased thanks to “heightened trade and geopolitical tensions”, a veiled reference to the tit-for-tat trade dispute between Washington and Beijing.

US President Donald Trump has announced billions of dollars’ worth of additional tariffs on Chinese goods, claiming the country is systematically cheating on globally agreed trade rules.

Beijing has announced retaliatory measures, as it seeks to protect growth that is vital to the country’s rising political clout.

The result has been a sharp sell-off on equity markets and mutterings of concern from central banks across the globe.

Following Wednesday’s finance minister’s meeting, host and Papua New Guinea treasurer Charles Abel warned “protectionist trends stemming from trade tensions and the buildup of debt are troubling and a real threat to development and prosperity right around the APEC region”.

APEC leaders will gather in Papua New Guinea next month to try and sort through the dispute.

A lengthy statement from the bloc’s finance ministers late Wednesday did not bode well for agreement.

The document amounted to a wish list of competing interests among member states, sounding the alarm about “high and growing debt levels” while arguing “fiscal policy should be flexible and growth-friendly”.

Amid concerns that the Trump administration was pursuing a strong dollar policy and persistent suspicions that China is similarly manipulating currency exchange rates to gain a competitive edge, the group did say it would “refrain from competitive devaluation and will not target our exchange rates for competitive purposes”.

Asian markets resumed their downtrend on Thursday as investors contemplated more interest rate hikes by the Federal Reserve, while Washington added to China-US frictions and Brexit negotiators struggle to find common ground.

The broad rally across world markets in the middle of the week that was fuelled by upbeat earnings gave way to ongoing uncertainty about the global outlook.

Minutes from the Fed’s latest policy meeting showed board members expect to hike borrowing costs as the world’s top economy goes from strength to strength and inflation picks up.

However, some members highlighted the chances of further instability among emerging markets, which have been battered in recent months by a flight of capital to the US and fuelling concerns of contagion that could throw the global economy off track.

The minutes sent the US dollar higher on Wednesday and it held its gains in Asian trade against its peers, while high-yielding and emerging market currencies were deep in the red.

All three main Wall Street indexes ended negative — a day after chalking up their best day in more than six months — with below-par earnings denting sentiment.

And in Asia Tokyo ended the morning 0.5 percent lower, while Sydney lost 0.1 percent, Seoul fell 0.6 percent and Singapore shed 0.5 percent.

Hong Kong, which returned after a one-day break to play catch-up with Wednesday’s rally, was flat.

Shanghai dived 1.7 percent as already strained relations between China and the US took another hit after the White House said it plans to withdraw from an international treaty on postal rates in a move aimed at pressuring Beijing.

– Trump ‘has gone postal’ –

The move was pushed by top advisor Peter Navarro, according to The New York Times. Navarro has encouraged Donald Trump to crack down on China on a variety of trade and political questions that he has argued are disadvantaging the US.

The “president has gone postal, escalating US-China tensions and a stronger dollar will pose considerable headwinds to local equity markets”, warned Stephen Innes, head of Asia-Pacific trading at OANDA.

“Unlike yesterday’s rally where participation was relatively light, early volumes are looking robust, suggesting investors continue to probe markets downside where more significant tail risk remains.”

Also Wednesday, Treasury Secretary Steven Mnuchin refused to call China a currency manipulator but raised concerns about the yuan’s fall and Beijing’s exchange practices.

“Of particular concern are China’s lack of currency transparency and the recent weakness in its currency,” he said in releasing a twice-yearly report to Congress on how countries manage exchange rates and trade.

The pound continued to struggle after British Prime Minister Theresa May’s Brexit speech to counterparts at a Brussels summit fell flat, with the two sides at a impasse over the fate of the Irish border.

Antonio Tajani, the president of the European Parliament, said May offered them “nothing substantially new” to discuss when they retired for dinner afterwards without her.

However, there was some hope as May considers an offer from EU negotiator Michel Barnier to add a year to the 21-month post Brexit transition period, which would provide more time to hammer out a solution to the border question.

On oil markets both main contracts extended Wednesday’s sharp losses that came on the back of data showing a jump in US stockpiles, which overshadowed the brewing crisis in Saudi Arabia over the disappearance of journalist Jamal Khashoggi.

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S. Jack Heffernan Ph.D. Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.

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