(Bloomberg) -- President Donald Trump gave China’s stock market a pleasant surprise by not announcing any tariffs on the Asian nation on his first day in office. But investors aren’t resting easy.
Trump, who threatened tariffs of as much as 25% on Mexico and Canada by Feb. 1, left traders guessing on his China plans by declining to say when he would impose additional levies. While Chinese stocks in Hong Kong gained more than 1% on Tuesday, the uncertainty has some investors bracing for more volatility in the days ahead.
For Ronald Temple, chief market strategist for Lazard’s Financial Advisory and Asset Management businesses, it isn’t yet time to buy Chinese stocks.
“I would be reluctant to add any exposure to China now because the markets have not priced the risk of tariffs being imposed on China appropriately,” Temple said in an interview Tuesday. “The actual announcement of tariffs will probably give you a sell off in Chinese equities and maybe more broadly EM equities.”
Expectations on Trump’s action on China had dominated market moves heading into his inauguration. Stocks had run up in recent sessions as Bloomberg News reported last week that Trump’s team was considering taking a gradual approach to raising tariffs. Prior to that, concerns about an escalation in trade tensions as well as China’s economic slowdown had caused the MSCI China Index to enter a bear market.
Volatility spikes are expected to be a common feature for the next four years, given Trump’s unpredictability on policies.
Tuesday’s market performance also suggests investors are taking Trump’s lack of immediate assault on China with a grain of salt.
The CSI 300 Index, a benchmark of onshore shares, erased a bulk of its 0.6% rise to end the day up just 0.1%. The offshore yuan weakened 0.4% after strengthening more than 1% overnight.
Global markets went on a rollercoaster ride as investors tuned into a flurry of executive orders signed by Trump. A Bloomberg gauge of the dollar gained 0.5% after sliding more than 1% on Monday. Ten-year US Treasury yields fell as much as 10 basis points in Asia on Tuesday, as traders recalibrated inflation bets stoked by fears of higher tariffs immediately.
Following Trump’s comments on Canada and Mexico, their currencies fell as much as 1.4% each.
“We think that volatility will pick up,” said Norman Villamin, group chief strategist at Union Bancaire Privée. “That’s one of the reasons why we’ve built that 15% position in the hedge funds now because we think they’re positioned to capitalize on that volatility.”
Hopes for an easing of Sino-American tensions have been rising following a phone call between Trump and Chinese President Xi Jinping last week, which the US leader described as “very good.”
However, during an impromptu press conference in the Oval Office as he signed executive orders on Monday night, Trump at times indicated that he did plan to impose tariffs because of China’s role exporting fentanyl precursor chemicals, as well as his anger over Chinese influence on the Panama Canal.
He also indicated he could impose taxes on Chinese goods if Beijing blocked the sale of the social media app TikTok to a US entity. While a trade war is nothing new for Beijing, the Chinese economy is in a much weaker state than during Trump’s first presidency, with a bigger reliance on exports.
“The tariff concern on China is not going away but at least we have avoided the worst-case scenario,” said Xiadong Bao, a fund manager at Edmond de Rothschild Asset Management. “We stay tuned for the potential tariff narrative change from Trump, and are highly focused on the guidances from the companies for the first quarter.”
--With assistance from John Cheng.
