SYDNEY: Asian shares dropped on Tuesday as investors contemplated the implications of a potential Trump victory for China, while the dollar gained for a second consecutive day despite dovish comments from the Federal Reserve fueling expectations of more US rate cuts this year.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.5%, following a 0.3% decline on Monday. After returning from a public holiday, Japan’s Nikkei index rose 0.4%.
Investors continued to react to the attempted assassination of former US President Donald Trump on Saturday. Trump, the favorite to win the White House in November, nominated J.D. Vance as his vice-presidential running mate on Monday.
Wall Street ended higher, with the Dow Jones hitting an all-time closing high, driven by gains in energy and banking shares. Bitcoin surged 6%, gold neared a record high, and the yield curve steepened as investors favored trades associated with a potential Trump victory.
“J.D. Vance is known for his aggressive stance on China, seeking improved trade deals for the US, which is weighing on sentiment towards China,” said Chris Weston, head of research at Pepperstone. “This led to increased selling in Chinese equities yesterday.”
The Shanghai Composite index dropped 0.3%, while Hong Kong’s Hang Seng index fell 1.4%, following a 1.5% decline the previous day. Weak economic data from China has heightened concerns that Beijing may miss its 5% growth target this year without significant stimulus.
Fed Chair Jerome Powell provided some positive news for Wall Street on Monday, stating that the three US inflation readings over the second quarter bolster confidence that inflation is returning to the Fed’s target sustainably. Markets are now fully pricing in a quarter-point rate cut from the Fed in September, with a total easing of 68 basis points expected by year’s end.
The US dollar remained stable overnight but gained buying interest as some investors bet on a Trump victory. The dollar index rose 0.1% on Tuesday against a basket of major currencies to 104.34. It increased 0.3% against the Japanese yen to 158.55 per dollar, following suspected market intervention by Tokyo last week.
“I’ve bought dollars here, believing the US dollar has probably bottomed for now,” said Tony Sycamore, an analyst at IG. “Given the soft CPI data and dovish Powell, I see upside risks for the dollar. The possibility of a Trump administration increasing tariffs on China is negative for Chinese stocks. Combined with a stronger US dollar and higher yields, it could be a challenging period for the Hang Seng.”
Long-term Treasuries stabilized in Asia, with the 10-year yield down 1.5 basis points to 4.2138%, after rising four basis points overnight.
In commodity markets, gold rose 0.2% to $2,426.18 an ounce, approaching a two-month high. Oil prices edged down amid concerns over a slowing Chinese economy affecting demand. Brent futures fell 0.2% to $84.72 a barrel, while US West Texas Intermediate (WTI) crude slipped 0.2% to $81.77.
