10 September 2018
Asian MornING Bytes

General market tone: Risk off 

International theme: US jobs point to Fed Hike, Trump doubles down 

Emerging markets: Investors await word on the trade front

International theme: NFP points to Fed hike, Trump doubles down

  • US labour data continues to point to a tightening path for the Fed as NFP beat the market consensus and wage growth cemented a rate hike in September.
  • On the trade front, Canada and the US remain in limbo on discussions, with the Canadian dairy tariff the stumbling block to an agreement. China’s trade surplus reported over the weekend hit a nerve with President Trump who pledged tariffs on an additional $200 billion of goods on top of the negotiated $200 billion.     
China: Ready to strike back

China is gearing up to respond to an expected escalation in US trade agression. Counter-measures against US exports and US business interests look likely, while fiscal and monetary stimulus aims to support the Chinese economy  

Trade war with the US likely to escalate

On 3 August China’s Ministry of Commerce announced a $60 billion list of goods on which to impose tariffs ranging from 5% to 25%. This came after US President Trump said he would increase the tariff rate on the next $200 billion of goods to be hit from 10% to 25%. Together with the US’s previous tariffs on $50 billion of Chinese exports, this would mean nearly half of China’s exports to the US are covered by tariffs. This will have a major impact on China’s export, manufacturing and logistics sectors, and therefore the economy as a whole.

China’s retaliatory tariffs will not be enough to match the US like-for-like because China imports much less from the US than it exports. For this reason,  China is very likely to impose qualitative retaliation (behind the border obstacles than make it more difficult for US companies to compete in Chinese markets) when the US imposes the next tariffs in order to fully match. The form that qualitative retaliation will take is uncertain, and how harsh these measures will be is also not known. Qualitative retaliation is open-ended in nature, and could create much more uncertainty in the market than simple tariffs.

The Chinese response will depend on how far the US goes with its next round of tariffs. Negative feedback from US companies could pressure the US government to trim the list of goods hit by tariffs, and lower the rate imposed. In that case, China would not retaliate as harshly and the dynamic between the two sides might change for the better. This may lead to risks subsiding gradually.

Malaysia: Economy off to a good start in third quarter

The balanced economic risks underpin our view of the Malaysian ringgit (MYR) regaining its status as an Asian outperformer once the external uncertainty lifts. Our end-year forecast for the USD/MYR rate is 4.25

First strong July trade figures and then strong industrial production, both suggesting that the Malaysian economy is off to a strong start in the third quarter. The country’s GDP growth is slowing but the economy isn’t falling off a cliff. The balanced economic risks underpin our view of the Malaysian ringgit (MYR) regaining its status as an Asian outperformer once the external uncertainty lifts. Our end-year forecast for the USD/MYR rate is 4.25, revised recently from 4.35 (spot 4.14).

Taiwan: Another month of weak exports

It's been another month of weak Taiwan exports. There should be temporary support from handset sales in September but Taiwan's dependence on this industry means the economy is vulnerable to external risks

Another month of weak export growth

Exports grew 1.9% year on year in August, down from 4.7% in July, while imports grew moderately at 7.9% YoY in August, down from 26.12% YoY in July.

Exports of electric parts grew only 1.3% YoY, which is very slow growth, and integrated circuit exports grew at a mere 0.4% YoY in August from 7.0% YoY in July.

We expect September to be a better month for Taiwan exports because of the scheduled handset sales in the month.

Reading time around about 4 minutes

Good MornING Asia - 10 September 2018

The risk aversion continues to be a key theme for the markets as President trump doubles down tariffs threat to $267bn of Chinese products, on top of $50bn already implemented and $200bn in the pipeline 

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