• Asian shares surge as investors anticipate a less aggressive tariff approach from U.S. President-elect Donald Trump.
• The MSCI's broadest index of Asia-Pacific shares outside Japan rose by 0.03%, while Japan's Nikkei jumped 2%.
• In China, the CSI300 index and Shanghai Composite Index reversed early losses to gain 0.28% and 0.17%, respectively.
• The market's reaction underscores the significant impact of trade policies on global financial markets.

Asian shares have recently seen a positive surge, following Wall Street's lead, as investors anticipate a less aggressive tariff approach from U.S. President-elect Donald Trump. The MSCI's broadest index of Asia-Pacific shares outside Japan rose by 0.03%, while Japan's Nikkei jumped 2%, fueled by a rally in technology stocks. However, European stocks seemed to be heading for a negative start after Monday's gain, with EUROSTOXX 50 futures falling 0.5% and FTSE futures retreating 0.47%.

In the U.S., S&P 500 futures slipped 0.07%, and Nasdaq futures lost 0.16% after the underlying indexes rose on Monday to more than a one-week high. This shift in the market was triggered by a report from The Washington Post stating that Trump's aides were exploring tariff plans that would apply to every country but only cover certain sectors deemed critical to national or economic security. This would represent a significant softening from promises Trump made during the 2024 presidential campaign.

The initial news sent stocks rallying and the dollar falling. However, Trump's subsequent denial on his Truth Social platform reversed some of the U.S. currency's declines. Khoon Goh, head of Asia research at ANZ, stated, No one really knows for sure what kind of tariffs or trade policies the Trump administration will implement.

Asia-Pacific Market Reactions

In China, the CSI300 index and Shanghai Composite Index reversed early losses to gain 0.28% and 0.17%, respectively. However, Hong Kong's Hang Seng Index slumped 1.89%. China's main stock exchanges asked some large mutual funds to restrict stock selling at the start of the year, as authorities sought to calm markets heading into a tricky period for the world's second-largest economy.

Inflation figures from the euro zone later on Tuesday will refine the outlook for more rate cuts from the European Central Bank. Markets are pricing in nearly 100 basis points worth of easing in 2025 for now. The week is filled with data releases particularly from the United States, which will be headlined by the December nonfarm payrolls report on Friday. That will be previewed by data on ADP hiring, job openings, and weekly jobless claims. Anything upbeat would support the case for fewer rate cuts from the Federal Reserve. Markets have already scaled back expectations to just 40 basis points for 2025.

Global Market Trends and Commodities

The prospect of a less aggressive Fed easing cycle this year has in turn kept U.S. Treasury yields supported, with the benchmark 10-year yield last at 4.6057%, after rising in the previous session to its highest since May. The two-year yield steadied at 4.2599%. Elsewhere, the dollar notched up a six-month high against the Japanese yen at 158.425. The Canadian dollar strengthened to 1.4311 per U.S. dollar, extending a rally on Monday after Canadian Prime Minister Justin Trudeau said he would step down in the coming months.

In commodities, oil prices edged lower on Tuesday, with Brent falling 0.03% to $76.28 a barrel, while U.S. crude eased 0.11% to $73.48 per barrel. Spot gold rose 0.38% to $2,645.41 an ounce.

This recent development echoes a similar event in history when President Trump, during his first term, had initially proposed aggressive tariffs but later softened his stance. This led to a positive reaction in the markets, as investors anticipated a more favorable trade environment. However, the current situation remains uncertain, and the final decision lies with President Trump. The market's reaction to these developments underscores the significant impact of trade policies on global financial markets.