Asia markets sell off as investors continue to react to Trump’s tariffs

Asian equity markets opened sharply lower on Monday across the board – triggering circuit breakers in some instances – with no particular region offering investors more respite.

Selloff exacerbated by Trump’s comments

The selloff was exacerbated by Trump’s comments over the weekend, indicating that the reciprocal tariffs were here to stay – unless the bilateral trade deficit between the US and specified country were to be eliminated entirely.

The comments further raise the uncertainty of potential negotiations or reprieves, especially given that even countries with which the US has a surplus with were hit with a 10% baseline tariff.

Markets were further disturbed by Trump’s suggestion that the US equity market rout was simply the consequence of a “medicine” to fix the US current account deficit.

Trump instead touted the benefits of Treasury yields coming down, though it seems this was largely due to a “risk off” move combined with the market pricing for more Fed cuts.

However, Fed Chair Powell’s speech last Friday indicated that the Fed was in no rush to cut rates and yields moved back up slightly in response.

China on Friday announced retaliatory tariffs of 34% on all imports from the US from April 10.¹

We’re now in a wait-and-see period as further escalation from the US side is possible. Still, we do not believe that China nor the US wants to see a “tariff cascade” scenario.

Market reaction and investment implications for APAC markets

Today, the HSI and TAIEX saw larger drawdowns, with the greater China region returning from a longer weekend than typical due to a public holiday, both hovering close to a -10% decline at one point as of writing. The TOPIX was also down more than 7% today.

One reason for the outsized move in Asian markets today is that their economies have larger trade orientation (hence the term “Asia export-model”).

Further, the simplistic methodology the white house has taken to calculate retaliatory tariffs (taking the bilateral trade deficit and dividing it by the countries total US exports) means that Asian countries were hit with higher tariffs. 

The immediate concern is what happens to growth in the APAC region – as downside risks have intensified. Policymakers are likely to ramp up fiscal and monetary support, cutting policy rates and rolling out initiatives to boost domestic demand.

Asia bank stocks saw outsized losses, in part due to the market pricing for rate cuts and subsequently lower net interest margins.

Still, Asian currencies have outperformed relative to the US dollar. The Japanese Yen especially is exhibiting its defensive and safe haven characteristics.

It’s possible the weaker dollar is reflecting that when you add the cumulative damage done by tariffs across all trading partners, the US economy will be more impacted than most others.

In our view, investors should stay invested in Asia as the region looks a lot more attractive on both on a valuation point of view but also from a relative growth perspective.

Asian policymakers are likely to ramp up both fiscal and monetary stimulus to provide a shield to their local economies and ensure that growth fundamentals are on track. Today's market movements suggest that the tariffs could backfire.

Investors are more concerned about the health of the US economy and whether tariffs will trigger a domestic recession. Even prior to the tariff announcements, recent consumption data in the US has been soft, and inflation expectations are spiking.

The longer policy uncertainty continues, the greater the pressure on business and consumer sentiment. The US economy could be facing stagflation, and investors may look for cover elsewhere.

Tariff scenarios and preferences

As the tariff situation is evolving, we lay out a couple of scenarios, and our asset preferences based on the different outcomes. We anticipate significant volatility and downward pressure on risk assets in the near term.

We also must recognize that earnings uncertainty increases for each day that these high tariffs are in force. Notably, “normal” correlation between stocks and bonds has returned.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.