US stock futures and the dollar declined, while Hong Kong shares retreated from recent highs. This downturn was triggered by escalating trade tensions between the US and China, with both countries imposing new tariffs on each other, raising concerns about a wider and more damaging trade conflict, reports Reuters.
Momentum Reversal
The S&P 500 futures initially rallied on news of last-minute deals between Mexico and Canada to avoid U.S. tariffs. However, this momentum quickly reversed, with futures now trading 0.2% lower. The dollar index also erased earlier gains, trading 0.1% lower at 108.86. European stocks, led by a 0.87% decline on Monday, saw a slight slip in morning trading. Germany’s DAX index remained flat, while Britain’s FTSE 100 dipped 0.3%.
Hong Kong’s Hang Seng index reached 2025 highs, fueled by optimism that China would also negotiate a resolution to its trade dispute with the U.S. However, gains were partially pared back, with the index trading around 2.8% higher. This optimism stems from expectations of increased Chinese stimulus spending to counter the impact of U.S. tariffs.
The dollar surged against the offshore yuan on Monday but weakened 0.16% on Tuesday. The Australian dollar, often viewed as a proxy for the yuan, also declined 0.3% to $0.6209.
Mainland Chinese markets remained closed for the Lunar New Year. Investors are now awaiting the Wednesday morning announcement of China’s currency trading band for clues regarding the country’s response to the escalating trade tensions with the U.S., particularly in terms of potential yuan devaluation to mitigate the impact of tariffs.
Uncertainty Looms
The start of the week witnessed significant market volatility driven by Trump’s fluctuating trade policies. The Canadian dollar experienced its most dramatic one-day swing since the pandemic’s onset, while the S&P 500 fell by 1.9% before closing with a 0.76% decline.
Investor anxiety fueled a surge in gold prices, with prices trading just below Monday’s record highs of $2,817 per ounce. Bond prices slightly declined, and the benchmark 10-year Treasury yield increased by 3 bps to 4.579%.
The euro remained steady at $1.0341, while the dollar strengthened against the yen, rising 0.3% to 155.28.
J.P. Morgan’s chief U.S. economist, Michael Feroli, observed that these developments may reinforce the Federal Reserve’s inclination to maintain a cautious stance and minimize intervention.
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Source: Reuters
