Hang Seng Index and Nikkei Jump on Trade Optimism: US-China Talks Awaited

US Markets See Volatility Spike on Tariff Developments

Is a new US-China trade war brewing? Here’s what it means for investors.

On February 3, US equity markets posted losses amid tariff concerns. The Nasdaq Composite Index slid by 1.20%, while the Dow and S&P 500 declined by 0.28% and 0.76%, respectively.

US President Trump suspended planned 25% tariffs on Canadian and Mexican goods after swift agreements to bolster border controls aimed at curbing fentanyl trafficking and illegal immigration. However, tariffs on China remain on track to take effect at 0501 GMT, February 4, unless a last-minute deal is reached. Trump is reportedly scheduled to speak with China’s Premier Xi Jinping later this week.

US Manufacturing Sector Rebounds Testing Fed Rate Cut Expectations

US Manufacturing PMI data contributed to the pullback. The ISM Manufacturing PMI increased from 49.3 in December to 50.9 in January. Significantly, the ISM Manufacturing Prices Index rose from 52.5 to 54.9, with the Employment Index jumping from 45.3 to 50.3. The PMI trends supported a more hawkish Fed rate path, pressuring risk assets.

While a potentially more hawkish Fed remains a market headwind, tariff relief set the tone for the Tuesday, February 4 Asian session. The impact of sweeping tariffs on US import prices and inflation could be more significant than manufacturing sector price trends.

Hang Seng Index Rallies on Tariff Optimism

The Hang Seng Index set the pace for the Asian markets, rallying 1.94% on Tuesday morning. Hopes for the US and China to reach a trade agreement fueled demand for Hong Kong-listed stocks.

Tech stocks outperformed, with the Hang Seng Technology Index soaring 3.94%. Baidu (9888) advanced by 2.96%, while Alibaba (9988) extended Monday’s gains, rising 2.87% on AI sentiment.

Brian Tycangco, editor and analyst at Stansberry Research, cited key factors driving the tech sector breakout:

• Optimism about trade/tariff talks between Xi and Trump.
• Very low valuations.
• Underlying recovery in real estate.
• Massive support for AI development and DeepSeek rollout.
• Strong growth in EV sales.

Meanwhile, China’s mainland equity markets remained closed for the Lunar New Year holiday and will resume trading on February 5. US-China trade developments will be a key factor influencing market sentiment on Wednesday’s open.

Nikkei Index Rebounds Amid Yen Weakness

Japan’s Nikkei Index advanced by 1.24% on Tuesday morning. Positive US tariff-related news and a weaker Japanese Yen boosted demand for Japanese stocks.

The USD/JPY pair climbed 0.34% to 155.205 in the morning session. Japanese Yen trends could influence corporate earnings and valuations for export-focused stocks. Additionally, easing threats of sweeping US tariffs could ease bets on a hawkish Fed rate path, potentially lowering borrowing costs.

Notable movers included Tokyo Electron (8035) and Softbank Group (9984), which gained 1.77% and 0.93%, respectively. Export-linked stocks Sony Corp. (6758) and Nissan Motor Corp (7201) posted gains of 2.34% and 1.83%, respectively.

ASX 200 Edges Higher as China Tariffs Loom

Meanwhile, Australia’s ASX 200 Index had a more cautious start to Tuesday’s session, edging 0.29% higher. Looming US tariffs on Chinese goods capped the upside. Banking, mining, and tech stocks contributed to the gains.

Mining giants BHP Group Ltd. (BHP) and Rio Tinto Ltd. (RIO) gained 0.89% and 2.06%, respectively. SGX TSI Iron Ore CFR China (62% Fe Fines) Index Futures advanced 0.57% on Tuesday, fueling demand for miners.

The S&P/ASX All Technology Index reversed its losses from Monday, rallying 1.56%.

Outlook: Risks and Opportunities Ahead

Geopolitical tensions, US tariff policies, and AI sector developments will continue influencing risk sentiment. AI stocks may outperform, but trade-linked sectors, including mining and manufacturing, could experience increased volatility.

The Hong Kong, Mainland China, and Australian markets could soar if China negotiates a deal with the US and advances its AI initiatives. Conversely, escalating trade tensions could impact risk sentiment, potentially overshadowing AI-driven market optimism.

Discover strategies to navigate this week’s market trends here.