Markets Decline as Trump’s Tariffs Trigger Risk Aversion: Weekly Financial Recap

(Bloomberg) — The global equity downturn continued to impact Asia, where the dollar strengthened and Treasury yields decreased following President Donald Trump’s tariff announcements that influenced investors to reduce exposure to risky assets.

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Asian share benchmarks declined to levels not seen in over two weeks, mirroring a 1.6% drop in the S&P 500 on Thursday, which wiped out the year’s gains. Meanwhile, the Nasdaq 100 fell by 2.8%, and Nvidia’s stock plummeted by 8.5% due to disappointing earnings that negatively impacted the Magnificent Seven group. Bitcoin also experienced a significant downturn, falling 25% from its record high achieved just six weeks prior.

The dollar maintained its Thursday gains after Trump announced that a 25% tariff on imports from Canada and Mexico would take effect on March 4, along with an additional 10% tariff on Chinese imports. Economists suggest that these tariffs could have adverse effects on US economic growth, exacerbate inflation, and potentially lead to recessions in both Mexico and Canada. Should no last-minute negotiations occur, taxes will increase on over $1 trillion worth of imports.

“These developments have led market players to reevaluate their perspectives on tariff-related risks,” commented Jun Rong Yeap, a market strategist at IG Asia Pte. “Whether this is merely a tactic in negotiations or a definitive decision remains uncertain, but the markets are hesitant to take risks.”

In Asian trading on Friday, Treasury yields continued to decline, with short-term US government debt extending its previous gains. The yield on the 10-year Treasury note fell to approximately 4.24%, marking the lowest point since December.

The announcement of additional tariffs on Chinese goods raises concerns about the possibility of retaliatory actions from Beijing, potentially escalating tensions between the two largest economies in the world.

“The new 10% tariff on China is disheartening as it perpetuates uncertainty and heightens the likelihood of ongoing tariff negotiations,” remarked Billy Leung, an investment strategist at Global X ETFs. “The market was already weary of tariff discussions, and now investors face further reassessment.”

Despite the short-term uncertainties posed by tariffs, the overarching narrative surrounding Chinese markets remains positive, bolstered by optimism in artificial intelligence, according to Charu Chanana, chief investment strategist at Saxo Markets. She noted that attention will now shift to the upcoming National People’s Congress meeting next week, which could play a crucial role in maintaining current momentum in China.

In Hong Kong, Chinese share prices declined on Friday, reducing their monthly gains to 16%. The onshore CSI 300 Index is poised for its first weekly loss in a month.

“The interplay of rising tariff risks and a strengthening dollar could present short-term challenges, but expectations remain that these tariffs may serve as leverage in negotiations, and China’s government has the tools to implement stimulus,” Chanana added.

Recent data released on Thursday indicated robust growth in the US economy and a more persistent inflation rate than initially anticipated at the close of 2024. The gross domestic product (GDP) increased at an unchanged annualized rate of 2.3% in the fourth quarter, with consumer spending as the primary growth driver, advancing at a 4.2% rate.

“While investors are hoping for lower interest rates from the Federal Reserve, they prefer not to see a significant downturn in the economy,” explained Bret Kenwell from eToro. “If the economy does experience a slowdown, investors will want to witness a corresponding decrease in inflation as well.”

Concerns regarding the forthcoming tariffs on Canada and Mexico—the US’s largest sources of crude oil—drove oil prices higher. West Texas Intermediate crude rose by 2.2% on Thursday, surpassing $70 per barrel. Meanwhile, gold is on track for its first weekly decline of the year.

The yen appreciated against the dollar on Friday as inflation in Tokyo moderated more than expected. However, it is unlikely to prevent the central bank from contemplating further interest rate hikes.

Bank of Japan Governor Kazuo Ueda reaffirmed that the central bank remains ready to act in the bond market during exceptional circumstances involving rapid increases in bond yields, as noted during this week’s gathering of economic policymakers in Cape Town.

In Indonesia, the rupiah fell to its lowest level since April 2020, reflecting the impact of Trump’s tariff threats across Asian currencies. The main stock index in the country dropped more than 1%, bringing it close to bear market territory.

PCE Inflation Insight

President of the Federal Reserve Bank of Cleveland, Beth Hammack, indicated that interest rates are not “meaningfully restrictive” and should remain steady for some time as officials await clear evidence of inflation trending back to their 2% target.

These remarks precede the release of the Fed’s preferred inflation metric later on Friday, which is expected to show a moderation to the slowest rate since June. However, the sluggish progress in managing overall price pressures will keep policymakers cautious about any further rate cuts.

The core personal consumption expenditures (PCE) price index, excluding the often-volatile food and energy costs, is projected to have risen by 2.6% year-over-year as per data from the Commerce Department expected on Friday. Overall PCE inflation is also anticipated to show an annual decrease based on the median forecast from economists surveyed by Bloomberg.

“Signs that price pressures may be experiencing a resurgence, even prior to the potential effects of additional tariffs, should serve as a warning regarding the near-term inflation outlook,” cautioned Jim Baird of Plante Moran Financial Advisors.

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