Market Fragility on Show as Trade War, China Data Curb Optimism

(Bloomberg) -- The trade war just ratcheted up another notch and the outlook for Chinese manufacturing deteriorated further, signaling the caution that characterized a tumultuous August for global markets may have further to run.

And, with the U.S. Labor Day holiday on Monday, trading in Treasuries will be quiet. In Asia, focus will be on shares of Apple Inc. suppliers and clothing manufacturers to gauge the reaction to the latest round of tariff hikes.

The U.S. implemented 15% tariffs on about $110 billion in apparel, footwear and other Chinese imports on Sunday. Face-to-face talks between American and Chinese trade negotiators scheduled for Washington this month were still on track, President Donald Trump told reporters on Friday.

“This is the mother of all questions: Is Mr. Trump going to escalate or de-escalate over the next year?” Luciano Jannelli, head of investment strategy at Abu Dhabi Commercial Bank, told Bloomberg TV on Sunday. “It’s difficult to say.”

According to Bloomberg Intelligence estimates, Chinese exports of shoes and clothing to the U.S. could drop by more than 3% year-on-year in the second half of this year as a result of the tariffs.

Further Complications

“The tensions will escalate and many official bank house views that had a U.S.-China trade deal over time as the base-case scenario might have to revise this as the clashes in Hong Kong further complicate any discussion between the Trump administration and the Chinese Communist Party,” said Rainer Michael Preiss, a portfolio strategist at Taurus Wealth Advisors Pte.

Data on Saturday showed China’s manufacturing sector remains under pressure. The purchasing managers’ index dropped to 49.5, marking the fourth month of shrinking factory output in the world’s second-largest economy.

Still, the latest tariffs that came into effect on Sunday were widely anticipated and may already be reflected in market prices, some investors said.

“The market expected the tariffs” to kick in, said Kerry Goh, CEO and CIO of Kamet Capital Partners Pte., a Singapore-based multi-family office. “I don’t think there will be a big move” on Monday.

For Jingyi Pan, a strategist at IG Asia Pte., it remains prudent to play defensive.

“It does appear that the disagreements between the two sides will drag on with negotiations yet to lead to any way out of the current gridlock,” she said.

Here are a few areas to monitor in trading on Monday:

Apple Suppliers

The new duties will hit Apple products that made up at least 10% of sales in the company’s 2018 fiscal year, such as the Apple Watch, AirPods and iMac computers, according to Bloomberg data. Shares of Foxconn Technology Group, the U.S. company’s main assembly partner, dropped as much as 0.5% and Luxshare Precision Industry Co., which provides components for wearable devices like the Apple Watch, fell 0.3% in early trading.

Gold

A more than 7% surge for gold in August looked set to go further after ending last month at about $1,520 an ounce, with the spot price up 0.3% on Monday. “It’s not just the tariffs but the Hong Kong unrest that could lead to renewed buying interest in gold,” said Preiss. The Singapore-based executive said gold could hit $2,000 over the next 12 months, bolstered by trade woes and further interest rate cuts by the Federal Reserve.

Manufacturer Stocks

Apparel and footwear manufacturers that derive revenues from Chinese exports to the U.S. are in the line of fire. Hong Kong-listed Yue Yuen Industrial Holdings Ltd., for one, makes about 13% of its shoes in China and is one of the largest shoemakers for Nike and Adidas globally, according to Bloomberg Intelligence. The stock gained 1.3% after falling as much as 1.3%. Taiwanese footware manufacturer Pou Chen Corp. dropped as much as 0.4%.

--With assistance from Manus Cranny.

To contact the reporter on this story: Ishika Mookerjee in Singapore at imookerjee@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Teo Chian Wei, Naoto Hosoda

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