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Asia market morning update - Tariffs threat

It had been a worse for wear weekend for risk sentiment, with a renewed tariffs threat for US-China trade relations at the horizon, one to weigh global equity markets at the start of the week.

Tariffs by Friday

Between North Korea’s latest missile test and President Donald Trump’s threat to impose fresh tariffs on Chinese goods, it had been a weekend of US foreign relations trying on risk sentiment. In particular, one would have certainly witnessed the more than 400 points drop in Dow futures in the early hours of Monday reflecting the dent from the latest tariffs announcement. This also derails the good works from the latest ‘goldilocks’ US jobs report which had contributed to the rally on Friday. Over and above the increase of tariffs to 25% for the $200 billion of Chinese goods, President Trump had also made known on the further threat for 25% tariffs on an additional $325 billion of Chinese goods, certainly not something to build good relations when one is having a trade negotiation with.

While there is the likelihood that the President could be attempting to extract more from the US-China trade negotiations in the final stages, pinpointing the slow progress in trade talks as the cause for the latest announcement, the broad perception towards this announcement is perhaps a threat to a likely deal at this point. Expect this to further undo the rally which had been pricing in a trade deal for global equity markets, particularly if things should escalate. This also places greater emphasis on the trade talks this week with Chinese vice-premier Liu He expected in Washington and under pressure to see a deal come through.

Asia open

Against the current backdrop of the step-up in risk sentiment from a possible worsening US-China trade relation, look to a broad decline in the region. As it is, early movers including the ASX 200 and KOSPI had given up 1.0% and 0.7% respectively. Japan remains away at the start of the week, but USD/JPY had been quick to reflect the heightened risk sentiment. Look to the rest of the region to fall in line with this dip ahead of the various other items we are looking this week as listed in our Asia week ahead.

Levels check

S&P 500: The uptrend for the S&P 500 index remains intact though as seen in the momentum indicator, bearish divergence threatens to form. The slide over the weekend, last seen with S&P 500 e-mini futures declining more than 2.0%, is expected to shift prices towards the 50-day moving average, one to watch into this week with US-China talks and US CPI in the horizon.

USD/JPY: The lift in risk sentiment at the start of the week had seen prices slide past $110.50 and remains on the decline as we pen this. Amid the absence of the Japanese market this Monday which could make for thinner liquidity, look to how much further the slide may sustain. US-China relations the key driver here.

US dollar index: The weekend US tariffs threat had seen to the US dollar index giving up some of its recent gains, particularly with the yen strengthening. That being said, the consolidation of prices at the current level awaiting further upsides may very well still be the case. This is more so with the Fed taking on a less dovish than expected neutral stance in their recent meeting that could see the market further adjust.

Spot Gold: With the abovementioned lift in risk sentiment, look to gold prices making a return this week. Any worsening of US-China trade relations this week may further boost prices this week despite the downtrend seen currently.

Yesterday: S&P 500 +0.96%; DJIA +0.75%; DAX +0.55%; FTSE +0.40%

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