Asian markets reversed initial gains and declined on Thursday, as concerns over the economic impact of US President Donald Trump’s trade policies outweighed optimism from cooler US inflation data. Despite overnight gains on Wall Street, investor sentiment in Asia remained cautious.

Wall Street Performance

Overnight, US equity markets closed mostly higher after lower-than-expected inflation data bolstered expectations of a Federal Reserve interest rate cut.

The Dow Jones Industrial Average fell 82.55 points, or 0.20%, to 41,350.93. In contrast, the S&P 500 gained 27.23 points, or 0.49%, closing at 5,599.30, while the Nasdaq Composite rose 212.36 points, or 1.22%, to 17,648.45.

“Whilst the recent inflation data gave some respite to the US stock market’s recent sell off, there are still many factors in play that can weigh heavy on US stocks. With cooler than expected inflation data, hopes were raised that the FED will be able to move forward with rate cuts through 2025, which could potentially support stock prices. Any sustained reversal, however, relies on many other factors at play in the market currently,” said Ross Maxwell, Global Strategy Operations Lead, VT Markets.

Asian Markets Decline

Japanese Stocks Impacted by Yen Strength: Japan’s Nikkei 225 index reversed early gains to close 0.08% lower at 36,790.03, after rising as much as 1.4% earlier in the session, tracking Wall Street’s gains. The broader Topix index ended 0.13% higher at 2,698.36.

Australian and Chinese Markets Under Pressure: Australia’s benchmark stock index declined by 0.5%, falling into correction territory as it is now 10% off its record high from February 14, according to Reuters. In China, the Shanghai Composite Index fell 0.4%, while Hong Kong’s Hang Seng Index declined by 0.58%, reflecting broader market concerns.

Indian Stock Markets Track Global Trends: Indian equity benchmarks Sensex and Nifty 50 also lost early gains, each trading 0.2% lower, mirroring the weakness observed in global markets.

Key Drivers of Market Sentiment

1. Concerns Over Trump’s Tariff Policies

President Donald Trump has intensified tariff policies against key US trade partners. Effective Wednesday, tariffs on all US steel and aluminum imports have been raised, affecting countries such as Brazil, South Korea, and the European Union. In response, Canada imposed over $21 billion in retaliatory tariffs on US goods, while the European Union announced plans to levy $28 billion in tariffs starting in April.

2. Recession Fears Amid Trade Tensions

Market analysts have raised concerns that Trump’s trade policies could push the US economy into a recession. A recent Barron’s report highlighted that Goldman Sachs Chief Economist Jan Hatzius lowered the 2025 US GDP growth forecast to 1.7%, down from the previous estimate of 2.4%.

3. Fed Rate Hike Concerns

Experts warn that Trump’s tariffs, coupled with his pledges to cut taxes, deregulate industries, and restrict immigration, could contribute to rising inflation, prompting the US Federal Reserve to adopt a more aggressive monetary policy stance.

“We are yet to see the effects of inflation of tariffs imposed on Mexico, Canada and China. If we see any escalation of the trade wars then this could all cause a rise in inflation which would lead to the FED having to tighten its monetary policy which would weigh on the stock market. So, although the recent inflation data is certainly supportive of a short-term trend reversal, there are many other factors at play that could negate this and shift sentiment for the longer-term,” said Ross Maxwell.

He also advised investors to monitor Trump’s trade actions, their inflationary impact, and the Federal Reserve’s upcoming policy meeting on March 18-19 for further indications of market direction.

4. Stronger Yen Weighs on Japanese Markets

The decline in Japanese stock markets was attributed to a stronger yen, following comments from Bank of Japan (BOJ) Governor Kazuo Ueda that bolstered expectations of an interest rate hike.

BOJ Governor Kazuo Ueda said he expects consumption to improve, as the rise in import costs moderates and wage growth strengthens. The comments drove bets for the BOJ’s early interest rate hike, pushing the Japanese government bond yields and the yen higher, Reuters reported.

5. Flight to Safer Assets

Amid heightened uncertainty, investors are shifting towards lower-risk assets, particularly US Treasury bonds. The yield on the benchmark 10-year US Treasury note has dropped nearly 60 basis points since mid-January due to recession fears. When investors increase bond purchases, their prices rise, leading to lower yields.

Going ahead, Ross Maxwell believes tech advancements in China and potential stimulus from the Chinese government to support the Chinese economy can help protect Asian equities.

“Whilst trade wars and tariffs will no doubt impact global economies, it is in no one’s interest to see the trade wars escalate, and I am sure there will be attempts to ease tensions and mitigate the impact of any potential trade wars,” Maxwell said.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.