US latest round of tariffs on Chinese imports appears to have been somewhat priced in and did not severely shock markets, according to the Bank of Singapore.
The S&P500 closed 0.6% down, which was not a steep decline. Meanwhile, the offshore Chinese yuan (CNH) and Asian equity markets similarly sold off at the open on Tuesday but the magnitudes are limited so far.
The muted reactions from Treasuries and safe havens, such as the Japanese Yen, also reflect fairly orderly investor sentiment.
Notably, Asian equities have significantly underperformed the US market over the last six months as tensions escalated, and the divergence is one of the starkest since 2010.
Since 19 March, the MSCI Asia Ex-Japan index has underperformed the S&P500 Index by 20%, further widening the valuation gap between the two markets.
The forward price-to-earnings (PE) of the MSCI Asia Ex-Japan index is currently trading at 0.3 standard deviation below its 10-year average level, versus the forward PE of the S&P500 index at about one standard deviation above the 10Y average.
‘At current levels, the risk-reward for Asia ex-Japan equities appears attractive for investors with longer holding periods,’ Bank of Singapore said.
Bank of Singapore has moved to an overweight position in Asia ex-Japan equities at the start of September.
Nevertheless, Bank of Singapore cautioned market volatility will be par for the course ahead as we enter the fourth quarter.
'There is still residual uncertainty over how the other shoe from China will drop in response to President Trump’s latest salvo, and we also do not expect a positive breakthrough in Sino-US trade talks before the US midterms elections in early November,’ it said in its report.
Meanwhile, the latest polls show the Republicans likely losing their house majority, and the Chinese will be keen to see how the political situation evolves before starting meaningful trade negotiations.
China announced late on Tuesday that it will be imposing additional tariffs on US goods, effective September 24, the same day the new US tariff is scheduled to take place.
The announcement was made in response to US announcement on its decision to impose 10% additional tariff on $200 billion worth of Chinese goods.