Fresh Trump tariff threats blunt risk appetite

• Selloff in risk assets appears contained

• Investors focused on prospect of US-China trade deal

• Dollar index moderates as ISM Manufacturing disappoints

• More tariffs on global trade would be welcomed by Dollar bulls

Most Asian stocks erased Monday’s gains following the selloff in US equities overnight, as US President Donald Trump appeared to have launched a new tariff tantrum. The US administration has proposed tariffs on $2.4 billion worth of French goods, in response to France’s digital tax that the US government says hurts American tech companies such as Google, Facebook, and Amazon. This announcement by the office of the United States Trade Representative follows President Trump’s tweets saying that he would reinstate steel and aluminium tariffs on Brazil and Argentina due to ‘massive devaluation of their currencies’.

Sentiment is mixed in the markets today as the hit to risk appetite appears limited, with moves in safe haven assets relatively contained. Gold pared its climb to trade around $1460 at the time of writing, USDJPY weakened by about 0.6 percent before bouncing off the 109.0 support level, while 10-year US Treasury yields are holding above the 1.80 percent mark.

Investors remain primarily focused on the outcome of the US-China trade talks, with less than two weeks to go before President Trump has to decide whether to impose more tariffs on $160 billion worth of Chinese goods. Investors are expected to hold back from making large moves in the interim, amid hopes that a limited trade deal remains the likely outcome.

Dollar index drops back below key 98.0 level

The Dollar Index (DXY) fell 0.56 percent before paring losses to trade around the 97.9 level. US ISM Manufacturing contracted for a fourth straight month in November as new orders slumped back to around their lowest since 2012.  Still, the weaker DXY has not translated into broad gains for Asian currencies, considering the risk-off tone in the markets triggered by President Trump’s latest tariff tantrum.

The unexpected slump in US manufacturing tempered optimism over the global economy that has seen better-than-expected readings out of China and Europe recently. While it’s still too soon to predict a sustained recovery for the global manufacturing sector, any potential green shoots may be wiped out if the barriers to global trade are heightened. New tariffs would trigger another wave of risk aversion while playing into the hands of the Dollar bulls.