Most Asian equities retreated on Thursday, while currencies edged lower, as growing concerns that U.S. President-elect Donald Trump's proposed policies may fuel inflation and slow rate cuts dented sentiment towards risky assets.
MSCI's gauge for emerging market stocks retreated 0.4%. Stocks in Thailand and Taiwan declined over 1% each, while those in Singapore slipped 0.5% after hitting a more-than-17-year high on Wednesday.
CNN reported on Wednesday that Trump is considering declaring a national economic emergency to provide legal justification for a series of universal tariffs on allies and adversaries. U.S. Federal Reserve officials worry that Trump's proposed tariffs, which include tariffs of 10% on global imports and around 60% on Chinese goods, and his immigration policies may prolong the fight against rising prices.
"While a less dovish Fed may mean smaller room for some Asian central banks to manoeuvre as far as FX is concerned, monetary policy decisions are mostly based on domestic fundamentals," Frances Cheung, a rates strategist at OCBC said.
"Our base-case is a total of 75bps of Fed funds rate cuts this year, which already represents a well-slower pace of rate cuts..."
The threat of tariffs has led to a selloff in global bond markets with the U.S. benchmark 10-year yield touching a more than eight-month high on Wednesday, providing support for the dollar and adding pressure to Asian currencies and bonds.
MSCI's emerging market currency index edged 0.1% lower.
The Thai baht slipped 0.2% while the Taiwan dollar retreated 0.3%. Indonesia's 10-year benchmark yield rose to 7.214%, hitting its highest level in more than 6 months.
"Building up to the Trump inauguration, markets are likely to stay anxious on the first Trump policy announcements, keeping the pressure on Asian FX..." Maybank analysts said in a note.
"Even so, with sentiments prone to swings, any release of good news such as signs of better U.S.-China relations can give quite some relief to Asian FX."
Tariff threats on China, a major trading partner for Asian countries, compound existing concerns about growth and deflation in the world's second-largest economy, with recent data pointing towards demand weakness despite Beijing's stimulus measures.
The Chinese yuan, which has been under selling pressure recently, was steady, hovering around a 16-month low. Equities in Shanghai declined 0.7%. Markets are awaiting the U.S. jobs report on Friday for clues on the outlook for Fed policy.
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