Asian shares took a hit on Tuesday, with investors weighing the potential impact of a Trump victory on China, while the U.S. dollar strengthened for the second consecutive day. Despite dovish comments from the Federal Reserve that have fueled bets on more U.S. rate cuts this year, market sentiment remained cautious.
The MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.5%, following a 0.3% decline on Monday. Japan’s Nikkei index, however, rose 0.4% as the market reopened after a public holiday.
The markets continue to digest the implications of the attempted assassination of former U.S. President Donald Trump on Saturday. Trump, who is currently the favorite to win the November election, nominated J.D. Vance as his vice presidential running mate on Monday. This political development has added to the market’s uncertainty.
In the U.S., Wall Street closed higher, with the Dow Jones Industrial Average hitting an all-time closing high, driven by gains in energy and banking shares. Bitcoin surged 6%, gold edged closer to a record high, and the yield curve steepened as investors positioned themselves for a potential Trump victory.
“J.D. Vance sits in the camp of taking China on head-first in a bid for improved trade deals for the U.S., and this will only weigh on sentiment towards China, where we saw better selling in China equity yesterday,” said Chris Weston, head of research at Pepperstone.
The Shanghai Composite index fell 0.3%, while Hong Kong’s Hang Seng index dropped 1.4%, following a 1.5% decline the previous day. Soft economic data from China has heightened concerns that Beijing might miss its 5% growth target for the year without significant stimulus measures.
Adding to Wall Street’s optimism, Fed Chair Jerome Powell remarked on Monday that the three U.S. inflation readings over the second quarter have increased 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 anticipated by year-end.
This outlook kept the U.S. dollar buoyant overnight. The dollar index firmed by 0.1% on Tuesday against a basket of major currencies, reaching 104.34. The dollar also rose 0.3% against the Japanese yen to 158.55 per dollar, despite Tokyo’s suspected market intervention last week.
“I actually have bought dollars here. I think the U.S. dollar has probably bottomed for now,” said Tony Sycamore, an analyst at IG. “We’ve had the reaction out of the soft CPI data and the dovish Powell. And I think the risks to the dollar are to the upside here.”
“The idea that the Trump administration is more likely to get to the White House and increase tariffs on China is not good for Chinese stocks. Coupled with a higher U.S. dollar and higher yields, it’s going to be a tough time for the Hang Seng,” Sycamore added.
Long-term Treasuries found some stability in Asia, with the 10-year yield dropping 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, nearing a two-month high. However, oil prices dipped amid concerns about slowing demand from a weakening Chinese economy. Brent futures fell 0.2% to $84.72 per barrel, while U.S. West Texas Intermediate (WTI) crude also slipped 0.2% to $81.77 per barrel.
As the week progresses, investors will be closely watching for further developments in U.S. politics, Federal Reserve communications, and economic data from China to gauge the potential impacts on global markets.
