WATCH: China says Trump forces its hand, will retaliate against new US tariffs

Theories why tariffs on $200bn left markets hopeful

It could’ve been worse. It’s already priced in. Tariffs won’t derail global growth. As Wall Street gets humming on Tuesday, investors are still trying to put their finger on the reason why financial markets have shrugged off the Trump administration’s latest salvo in the trade war with China.

Yes, there was the now-common knee-jerk reaction to last evening’s announcement that the US will slap tariffs of 10% on $200bn in Chinese goods: S&P 500 futures tumbled, the yen spiked and Asian futures signaled losses. Almost immediately though, those reversed and held even after China said it would retaliate without noting specific actions.

“It’s a bit of a strange reaction,” said Ayako Sera, a strategist at Sumitomo Mitsui Trust Bank in Tokyo. “Some investors seem to have already priced in the Trump administration’s announcement. The market moves suggest the event is over.”

It’s not that the latest escalation in the monthslong trade war is good news. It’s that there are several reasons investors had no need to panic: With Asian equities near the cheapest valuations in more than two years, emerging-market stocks in a bear market and the Shanghai Composite Index closing at the lowest since 2014 on Monday, some trade fallout has already been accounted for.

Trump’s plan to lift the levy to 25% next year means there’s room for negotiation between now and then, including the chance of a more conciliatory stance after the US mid-term elections. And while the tariffs may kick in next week, the economic impact will take a lot longer to be felt. That means there’s time to think about other things, like bumper Japanese profits. A media outlet reported Chinese officials may announce measures to help build transport networks, which sent industrial companies higher and reassured investors the authorities will support the economy.

Some are waiting for China’s full response. Chinese Vice Premier Liu He, President Xi Jinping’s top economic adviser, was set to convene a meeting in Beijing on Tuesday to discuss the government’s response to the US tariffs, according to a person briefed on the matter.

“Trump is now discounted, what is not discounted is a potential indirect retaliation by China," said Nader Naeimi, the head of dynamic markets at AMP Capital Investors in Sydney.

Others said this latest round of tariffs could have been worse.

“There were investors who’d been thinking a 25% tariff in one go is a possibility,” said Shogo Maekawa, a Tokyo-based global market strategist with JPMorgan Asset Management. “It could be considered something good in this realm of bad things.”

And then there were those who may have taken heart from China’s commerce minister saying the nation is confident in achieving its economic targets, even though the comments were from on Monday, before the tariff news. Treasury futures slipped after the statement was uploaded to China’s Commerce Ministry’s website.

Japan’s rally

Japanese stocks surged after a holiday on Monday. The Topix index closed 1.8% higher, the biggest gain since March.

“The market had anticipated the US would impose additional tariffs by the end of the month,” said Hiroaki Mino, a senior strategist at Mizuho Securities in Tokyo. “Trade frictions remain as a weight on the equity market, but the market is in the middle of digesting trade concerns and increasing expectations over Japanese corporate earnings.”

South Korean equities were modestly higher as President Moon Jae-in arrived in Pyongyang for talks with North Korean leader Kim Jong Un. The Australian dollar, a risk barometer that reversed its 0.5% decline, sat at 72.16 US cents.

Chinese equities fluctuated in morning trading and then jumped amid expectations the government will take steps to offset the negative effect of US tariffs.

What now?

While China has thus far vowed to match escalating US tariffs tit for tat, the real question is what Beijing will do once it runs out of goods on which to reciprocate, said Nick Twidale, chief operating officer at Rakuten Securities’ Australian unit.

“That’s where it gets interesting,” he said. “As we start to hit levels where they can’t reciprocate in terms of tariffs, then they can turn to other measures to counteract this move from the US and one could be to allow the currency to depreciate further and possibly faster.”

Plans to send Vice-Premier Liu He to Washington for talks are being reviewed, the South China Morning Post reported, citing an unidentified government official in Beijing.

“Of course, China’s response is critical. It could target $100bn of US exports with an additional 20% tariff to respond ‘proportionately’,” Nomura Holdings said in a report.

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