Shares dither, dollar falls as trade angst persists

Asian shares edged higher amid cautious optimism ahead of a potential call between President Trump and President Xi, as investors weigh the impact of ongoing trade tensions and tariffs. Recent data indicates a contraction in manufacturing activity in both the U.S. and China, suggesting tariffs are beginning to negatively affect manufacturers. The dollar fell to a six-week low ahead of U.S. nonfarm payrolls data, while oil prices rose on supply concerns.

Analysis

Global financial markets are navigating a period of heightened uncertainty, with Asian shares exhibiting cautious gains while the U.S. dollar declined to a six-week low (98.58 against a basket of currencies) primarily due to erratic U.S. trade policies and anticipation of a potential discussion between U.S. President Trump and Chinese leader Xi Jinping. The impact of tariffs is becoming evident, as U.S. manufacturing contracted for a third consecutive month in May, with suppliers experiencing the longest input delivery times in nearly three years, and China's factory activity also shrank in May for the first time in eight months. Economists at Wells Fargo noted that tariff pressures are beginning to affect manufacturers through slowing activity and declining inventories. Reflecting this unease, U.S. Nasdaq and S&P 500 futures each dipped 0.2%, contrasting with modest gains in European futures (EUROSTOXX 50 +0.28%, FTSE +0.15%). Asian markets showed resilience, with MSCI’s Asia-Pacific ex-Japan index up 0.6%, Japan’s Nikkei rising 0.66%, and Hong Kong’s Hang Seng Index rebounding over 1%. Mainland Chinese markets also saw slight gains (CSI300 +0.23%, Shanghai Composite +0.3%). Investor focus is also on the upcoming U.S. nonfarm payrolls data, which could influence Federal Reserve policy, especially as 30-year Treasury yields approach the 5% mark amid concerns over expanding U.S. federal debt, projected to increase by $3.8 trillion from a new tax-and-spending bill. Mizuho analysts suggest term premiums are re-pricing higher due to U.S. fiscal, trade, credit, and geoeconomic risks. In commodities, oil prices advanced on supply concerns, with Brent crude reaching $65.20 (+0.88%) and U.S. crude $63.13 (+1%), while spot gold climbed to a one-month high of $3,392.03 an ounce. The Bank of Japan Governor highlighted the extreme uncertainty surrounding global tariff policies, underscoring the prevailing moderately negative sentiment and uncertain market tone.

Key Decisions for Investors

• Investors should closely monitor the outcome of the anticipated call between U.S. and Chinese leaders, as any definitive news on tariffs could significantly shift market direction, necessitating portfolio flexibility.
• The upcoming U.S. nonfarm payrolls data is a critical short-term catalyst; a weaker-than-expected report could intensify pressure on the Federal Reserve to consider easing policy, potentially impacting the dollar, which has already fallen to a six-week low, and Treasury yields.
• Given the contracting manufacturing activity in both the U.S. and China and prevailing trade uncertainties, consider maintaining a cautious stance, potentially by evaluating exposure to cyclical sectors and exploring assets like gold, which has shown recent strength, or energy, where supply concerns are supporting prices.