With many investors on their summer holidays, it is natural to think August should be a quiet time for financial markets. But this August has been an exception.
One key cause of market volatility has been the intensification of US-China trade tensions, which has rattled investors’ nerves. The trade truce reached by the two sides on the sidelines of the Osaka G20 summit was broken, as US President Donald Trump threatened to slap 10 per cent tariffs on the remaining US$300 billion of Chinese imports.
This was quickly followed by the Chinese authorities’ response of allowing the US dollar exchange rate to break above the psychologically important 7 yuan threshold on August 5, in part reflecting low confidence of reaching a trade deal in the near term.
To make things worse, the US officially labelled China a currency manipulator the next day, although the labelling itself is largely symbolic.
At the same time, the global economy has been showing more signs of weakness, adding to investors’ worries. China’s July major activity indicators came in notably below market expectations, with industrial production growth at the lowest level in 17 years, highlighting downward pressures from tariff shocks.
Elsewhere in Asia, smaller open economies have been particularly badly hit by the deteriorating external environment. In recent months, second-quarter growth in Singapore and Hong Kong has disappointed, with both economies on the brink of tipping into a technical recession.
Thankfully, a few circuit breakers have now kicked in, helping to ease the market correction. One is the sensitivity of the US trade negotiation stance to equity market movements.
Following the sharp equity market declines earlier in the month, the US side has offered some concessions, including delaying the 10 per cent tariff increase for some Christmas shopping favourites until December – and extending the temporary licence for US companies to sell to Huawei for another 90 days.
The other plus is that Asian central banks are stepping up monetary easing to mitigate economic damage from trade uncertainty. In early August, the central banks of India and Thailand announced larger-than-expected rate cuts on concerns about the growth outlook. China’s loan prime rate, the new benchmark lending rate, was also reduced by 6 basis points this week in an effort to reduce corporate borrowing costs.
However, it is difficult to see significant near-term upsides for emerging Asia equities. While there are some signs of de-escalation of trade tensions, hopes of a quick resolution are low. The US economy remains solidly underpinned by a robust household and consumer sector, which appears to have been well insulated from deterioration in sentiment amid trade uncertainties.
This is likely to reduce the urgency on the US side to reach a trade deal, given the limited economic costs. Meanwhile, China seems to be standing firm on its core demand that all additional tariffs need to be eliminated before a trade deal can be reached.
The longer the trade conflict drags on, the more damaging it is for emerging Asian economies, as businesses delay decisions on capital investment and hiring amid elevated trade uncertainties.
Moreover, stimulus measures from China this time around may not provide much of a cyclical boost to the rest of the region. While Chinese policymakers are very likely to roll out more stimulus measures following the weak July data, there seems to be little appetite for overly aggressive easing.
The midyear Politburo meeting at the end of July struck a more dovish policy tone overall but ruled out using property market policy as short-term stimulus. Meanwhile, manufacturing-oriented Asian economies are less exposed to China’s infrastructure and consumption demand, which is the main focus of the current stimulus package.
Equities in the region are likely to remain volatile as they continue to be pushed and pulled, by lingering trade uncertainty and weaker growth momentum on one hand, and more support from central bank easing on the other.
Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management