Asian stock markets faced downward pressure on Wednesday as investors grappled with the implications of incoming US President Donald Trump’s renewed tariff threats against Canada, Mexico, and China.
This unease follows Trump’s pledge on Tuesday to impose new levies on these key trading partners.
The Canadian and Mexican currencies, the loonie and peso, remained weak following sharp declines to multi-year lows on Tuesday.
The Chinese yuan also edged closer to its four-month low from the previous session.
Similarly, the Australian dollar, often seen as a proxy for the yuan due to China’s significant trade relationship with Australia, neared its own four-month low.
However, the New Zealand dollar rebounded after the country’s central bank announced a smaller-than-expected interest rate cut of 50 basis points, defying some market predictions of a larger reduction.
Safe-haven yen rises as US dollar weakens
Amidst the market uncertainty, the safe-haven Japanese yen continued its ascent, reaching a two-week high against the US dollar.
The US dollar’s decline was further exacerbated by weakening Treasury yields.
Japanese stocks underperform, autos sector hit hard
Japan’s Nikkei index lagged significantly, falling 0.9%.
The automotive sector was particularly hard hit, declining over 3% on the Tokyo Stock Exchange.
This drop reflects the dual pressures of potential tariffs and the strengthening yen, both of which threaten to squeeze profit margins.
Mixed Performance Across Asian Markets
Taiwanese stocks dipped 0.2%, while South Korea’s KOSPI edged up less than 0.1%, struggling to recover from Tuesday’s 0.6% decline. Mainland Chinese blue-chip stocks fell 0.4%, but Hong Kong’s Hang Seng index managed a slight 0.1% gain.
Overall, MSCI’s broadest index of Asia-Pacific shares slipped 0.1%.
Asian markets diverge from Wall Street gains
The weakness in Asian markets contrasted with the overnight gains on Wall Street, where all three major indices closed higher.
S&P 500 futures indicated a potential 0.1% further advance.
This divergence underscores the specific concerns surrounding Trump’s trade policies within the Asian markets.
Trump’s tariff threats rattle investors
Early Tuesday in Asian trading hours, Trump announced on Truth Social his intention to immediately impose a 25% tariff on all goods from Mexico and Canada upon taking office, along with an additional 10% tariff on products from China.
He stated these tariffs would remain in effect until these countries addressed issues such as drug trafficking and migration across US borders.
“The theme on the day has been to buy America, and for some to begrudgingly open a Truth Social account, with confirmation that headline risk and the communication channels for price discovery in markets have officially evolved,” commented Chris Weston, head of research at Pepperstone.
He further noted the change in Trump’s approach compared to his first term: “he is far more prepared, has a clear game plan, and has the legal passage to execute without constraint,” leading markets to “expect bold action ongoing, with the noise in markets officially increasing even before inauguration.”
Currency markets and treasury yields respond
The offshore yuan weakened 0.1% against the dollar, approaching Tuesday’s low.
The Mexican peso also declined, nearing its overnight trough.
The Canadian dollar edged lower but remained above its previous session’s low.
Against other major currencies, the US dollar saw mixed performance, strengthening slightly against the euro but weakening against the yen, hitting its lowest point since November 10th.
US short-term Treasury yields also continued to decline, extending their pullback from Friday’s nearly four-month high.
Investors assess tactical and fundamental implications
Trading volumes were generally lighter this week due to the US Thanksgiving holiday, with many investors extending their break.
Market participants are also anticipating the release of the Federal Reserve’s preferred inflation gauge, the PCE deflator, later on Wednesday.
Shinji Ogawa, head of Japan cash equities sales at JPMorgan, observed that as the initial market reaction to Trump’s tariff threat subsided, “investors seem to view this as more tactical rather than fundamental, but enough to trigger risk off ahead of the long weekend.”
This suggests a degree of caution but not outright panic among investors.
Commodities markets react to geopolitical and supply dynamics
The New Zealand and Australian dollars saw mixed performance, with the Kiwi gaining ground while the Aussie slightly declined.
Bitcoin, the leading cryptocurrency, attempted to recover after a four-day decline from its record high, while gold prices ticked up slightly.
Oil prices, on the other hand, continued to fall as markets weighed the potential impact of a ceasefire between Israel and Hezbollah, in anticipation of Sunday’s OPEC+ meeting.
Both Brent and WTI crude futures declined, reflecting the easing of geopolitical tensions in the Middle East.
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