Trade war escalates as we pas the tipping point for a compromise
This weekly is a day late mainly because we wanted to see if there are any other issues worth addressing after the G7 summit. Trade war has escalated as China has finally hit back with its own tariffs on $75bn of US imports of autos and agricultural goods and US responding by raising its existing tariffs on Chinese goods from 25% to 30%, we look to have passed the tipping point of tit-for-tat retaliations. As we have noted, the US had given the Chinese almost no room for a face saving backdown, especially given the deteriorating political conditions in HK.
China leaves the door ajar for compromise but Trump threatens more action
Chinese policy makers today are still sounding somewhat conciliatory, pointing out that they are ready to reverse all tariffs if the US was ready to meet its demand of reversing its tariffs and allowing for more constructive talks in September which have yet to be cancelled. However, Mr. Trump’s latest threat at the G7 that he had the power to call for a national emergency and stop US firms to do any business with the Chinese yet again leaves little room for any major resolution and would take the trade war to a whole new level.
Huawei reprieve could be cancelled while Japan/Korea spat hurt tech outlook
Also with the US reprieve of 90 days on allowing its suppliers to continue to do business with Huawei now looking likely to be reversed, we think all suppliers to Huawei are likely to get hit again. With the bilateral relations between South Korea and Japan also deteriorating rapidly with former deciding to pull out of its intelligence trading pact, we believe there are significant risks building up for Japan’s semiconductor materials segment which only adds further uncertainties.
The yen likely to strengthen much further
As we have also consistently underlined in the past month, we think the yen is likely to continue its appreciation trend as BOJ looks to have no room to ease much more from here. With the Chinese yuan being allowed to depreciate further, the stage looks to be set for yet another round of currency contagion which would add even more pressure on the yen to strengthen. This can only add more pressure on the earnings of Japanese exporters which have generally budget for the yen/dollar rate of 108 level and yen/euro rate of 120, both now looking very optimistic given the global economic backdrop.
We are slowly turning less bearish on our own market
With foreign investors in the Japanese stock market having generally moved to underweight levels, the good news is that we are unlikely to see the same rate of selling we have seen in the past 18 months. With Japan’s retail investors looking to become net buyers and the yen strengthening, we are looking to gradually change our negative outlook for the Japanese stock market, especially given the compelling valuations we are seeing.