Tariff Worries Pressure Global Shares and U.S. Dollar

SYDNEY: Asian stock markets and the dollar dropped on Monday as tensions between the U.S. and China over trade persisted, while investors adopted a cautious approach before important U.S. employment figures and a widely anticipated reduction in European interest rates. Stocks in South Korean and Vietnamese steel manufacturers, significant Asian exporters of the metal to the U.S., fell in response to President Donald Trump's warning late Friday to raise tariffs on imported steel and aluminium to 50 per cent, effective June 4. The action attracted backlash from negotiators in the European Union. On Sunday, Treasury Secretary Scott Bessent stated that Trump would soon communicate with Chinese President Xi Jinping to resolve a conflict regarding essential minerals.

Beijing strongly dismissed Trump's trade critiques, implying a response may take a while. White House officials further minimised a court decision stating that Trump exceeded his authority by implementing blanket tariffs on imports from U.S. trading partners. "The court decision will make the future of trade policy more challenging, yet there is still a substantial array of provisions for the administration to achieve its goals," stated Bruce Kasman, chief economist at JPMorgan. "He mentioned a dedication to upholding a minimum U.S. tariff of no less than 10 per cent and implementing additional sector tariff hikes." An uptick in ASEAN to deter transhipment seems probable, and the preference for elevated tariffs on U.S.-EU trade continues.

Markets will be especially eager to observe whether Trump proceeds with the 50 per cent tariff on Wednesday or retreats as he frequently has in the past. During this period, caution prevailed, and MSCI's most comprehensive index of Asia-Pacific stocks excluding Japan decreased by 0.8 per cent. Japan's Nikkei declined by 1.3 per cent, whereas Hong Kong fell by 2.5 per cent. South Korean shares rose 0.2 per cent on optimism that a sudden presidential election on Tuesday would result in a decisive victor. EUROSTOXX 50 futures fell 0.3 per cent, DAX futures decreased 0.2 per cent, and FTSE futures remained unchanged. Speculation arose regarding the implications of Ukraine's remarkable assault on Russian air bases for the current peace negotiations. S&P 500 futures dropped 0.5 per cent and Nasdaq futures fell 0.6 per cent. The S&P increased by 6.2 per cent in May, whereas the Nasdaq surged 9.6 per cent amid optimism that the ultimate import tariffs will be significantly lower than the initially exorbitant rates. 

Preempting the tariffs has already resulted in significant fluctuations in the economy, with a decline in the first quarter probably leading to an increase this quarter as imports decrease. The Atlanta Fed GDPNow projection is at an annualised 3.8 per cent for April to June, but analysts predict a significant slowdown in the latter half of the year. This week’s data on U.S. manufacturing and employment will provide a current snapshot of activity, with payrolls expected to increase by 130,000 in May while the unemployment rate remains at 4.2 per cent. An increase in unemployment is one of the rare factors that might prompt the Federal Reserve to consider relaxing policy once more, as investors have mostly abandoned hopes for a rate cut this month or the next.

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A September rate hike is viewed as having about a 75 per cent likelihood, although Federal Reserve officials have refrained from fully supporting this expectation. This week’s schedule includes at least 11 Fed speakers, starting with Fed Chair Jerome Powell later today. Fed Governor Christopher Waller mentioned on Monday that rate cuts are still a possibility later this year due to perceived downside risks to economic activity and employment, along with upside risks to inflation from tariffs. A milder jobs report would ease pressure on the Treasury market, where 30-year yields are still approaching the 5 per cent threshold as investors seek a greater premium to compensate for the continually increasing debt supply. This week, the Senate will begin reviewing a tax-and-spending measure that is projected to contribute approximately $3.8 trillion to the federal government's $36.2 trillion debt.

Across the Atlantic, the European Central Bank is widely expected to reduce its rates by 25 basis points to 2.0 per cent on Thursday, while markets will be attentive to indications about the possibility of another adjustment as soon as July. The Bank of Canada convenes on Wednesday, with markets suggesting a 76 per cent likelihood it will maintain rates at 2.75 per cent, while projecting a dovish tone regarding future economic risks tied to tariffs. Increasing rate spreads have thus far provided only slight backing for the U.S. dollar. "The dollar has stayed close to the lower end of its range since 2022 and is significantly weaker than what interest rate differentials would suggest," remarked Jonas Goltermann, deputy chief markets economist at Capital Economics.

"Sentiment towards the dollar stays pessimistic, and it appears susceptible to additional negative developments regarding fiscal and trade policies." On Monday, the dollar dipped 0.4 per cent against the yen to 143.47, whereas the euro rose 0.2 per cent to $1.1370. The greenback dipped 0.2 per cent against the Canadian dollar to 1.3727, receiving no support from Trump's 50 per cent tariff threat on Canadian steel exports. In commodity markets, gold rose 0.6 per cent to $3,310 per ounce, after a decline of 1.9 per cent the previous week. Oil prices rose after OPEC+ chose to boost production in July by the same quantity as in the two previous months, providing relief to those concerned about a larger increase. Brent increased by $1.46 to reach $64.24 a barrel, and U.S. crude climbed $1.65 to $62.43 per barrel.