Thursday 28 Mar 2024
By
main news image

This article first appeared in The Edge Financial Daily on June 11, 2018

KUALA LUMPUR: The relative calm in the markets despite US President Donald Trump pushing ahead with tariffs on steel and aluminium imports from the European Union, Mexico, and Canada raises the question of whether investors are complacent about the risk of a full-blown trade war.

Analysts say it does appear that most investors are ignoring the possibility of the current trade tensions escalating to a major trade war.

Noting the resilience displayed by global equity markets, foreign exchange broker FXTM’s research analyst Lukman Otunuga said the risk of a full-blown trade war has not been fully priced in.

“Markets could be betting on G7 members to exploit the summit in Quebec to persuade Donald Trump to reverse his steel and aluminium tariffs on three of the US’ biggest trading partners,” Lukman said. He spoke before the summit, which brought together the leaders of the US, Canada, Britain, France, Germany, Italy, and Japan.

He noted that the trade tensions between the US and its allies had increased even before similar tensions between Washington and Beijing subsided.

“With regard to the US-China tensions, a veil of uncertainty continues to shroud the ongoing trade drama between the two nations,” said Lukman. “There is a risk that trade negotiations between the US and China fall apart if the US imposes tariffs up to US$50 billion (RM199.5 billion) on Chinese products.”

On the impact of a potential full-blown trade war, he said emerging market currencies such as the ringgit will depreciate as investors offload riskier assets.

“The growing tension could be very bad news for oil prices,” he added. “One of the drivers behind oil’s resurgence in recent months was optimism over improving global growth boosting oil demand. With escalating trade tensions threatening economic prospects across the world, this could negatively impact demand growth from major nations and emerging markets, ultimately spelling trouble for oil.”

Areca Capital Sdn Bhd chief executive officer Danny Wong agreed with Lukman that while investors were being cautious last Friday ahead of the G7 summit, they had yet to price in the negative risks from the escalated trade tensions.

The MSCI Asia Apex 50 fell 24.28 points or 1.73% to 1,375.50 last Friday, while the FBM KLCI eased 3.66 points or 0.2% to 1,782.15.

Wong believes investors will turn to a risk-off strategy if the current trade tensions worsen.

Another area that will hurt investment sentiment on risky assets would be the increasing geopolitical tensions seen globally. Political uncertainties in Spain and Italy, in addition to trade pressure from Trump as well as Britain’s long and difficult Brexit negotiations, also pose a risk to the European Union (EU).

A fund manager with a local insurance company said that while the risk of European Union breaking apart has subsided this year compared with 2017, it is not an impossible scenario and the impact from it would hurt global economy.

“The worst part is that EU is not the only concern,” said the fund manager who could only speak on condition of anonymity as he is not the company’s spokesperson.

“If you look at the Middle East, there is also unrest in that region especially with the US pulling out of the Iran nuclear deal,” he said, adding that political uncertainties are also seen in Venezuela, Brazil, and Mexico.

There is, however, a bright spot on the geopolitical front with the improvement in US-North Korea ties, and the peace summit between the two countries scheduled for tomorrow.

Nomura’s global market research analyst Young Sun Kwon said the base-case view is that both countries could reach an agreement in principle at the summit. He, however, would not rule out the possibility of another last-minute cancellation or delay of the summit.

Jameel Ahmad, global head of currency strategy and market research at FXTM, also believes that the summit will dictate market focus moving forward, saying that a positive meeting could be seen as an encouragement for the stock market in Singapore as much as the major markets across the US, Europe, and nearby markets in Asia, to nudge higher.

He, however, warned that in the event that the meeting takes an unexpected turn for the worse, it would be expected that there could be another period of risk aversion in the markets.

Another key risk to watch out for would be the faster-than-anticipated rate hikes in the US by the US Federal Reserve (Fed), Wong from Areca noted, as foreign funds could flow back to assets deemed as safe haven.

Deutsche Bank’s research team has warned that higher US rates and a depreciation of their local currencies would prompt central banks in emerging markets with weak external balances such as the Reserve Bank of India, Bank Indonesia, and Banko Sentral ng Pilipinas to hike their rates more aggressively.

“We expect those three central banks to raise rates further in the second half, even if the US goes ahead with tariffs on US$50 billion worth of Chinese goods and China retaliates in kind,” Julianna Lee, chief economist at Deutsche Bank, said in a report last week.

She, however, noted that central banks of Asian emerging economies with a relatively high sensitivity to exports but with a positive external balance such as the Bank of Korea, People’s Bank of China, and the Bank of Thailand could delay rate hikes until signs of a durable resolution of trade disputes. A rate cut is likely to come if a trade war that would push global growth sharply weaker takes place.

As for Malaysia, Lee said the relatively high government debt hints at limited fiscal stimulus but rate cuts are likely if a global trade war happens.

RHB Research Institute Sdn Bhd chief Asean economist, Peck Boon Soon, expects another rate hike by Bank Negara Malaysia in the second half of the year, due to the unwinding of the US balance sheet as well as the rising interest rates by the Fed.

      Print
      Text Size
      Share