Asian markets feel pain as trade war escalates. Europe gets a break

The escalating trade war between the United States and China hit stocks in Asia on Tuesday but markets in Europe and the United States were spared further losses.

Wall Street’s rout Monday was followed by losses on most major Asian markets. Hong Kong’s Hang Seng (HSI) closed 1.5% lower, the Shanghai Composite fell 0.7% and Japan’s Nikkei (N225) shed 0.6%. South Korea’s KOSPI managed to buck the trend, edging 0.14% higher.

It was the first chance Asian markets had to react to the latest retaliatory measures from China.

US stocks, meanwhile, were positive at midday on Tuesday, with the Dow up 285 points, or 1.1%, and the S&P 500 rising nearly 1.2%. Major European indexes including the FTSE 100 (UKX), CAC 40 (CAC40) and DAX (DAX) all finished higher.

Beijing announced late Monday that it would raise tariffs on $60 billion worth of US goods from June 1. That comes after the United States hiked tariffs from 10% to 25% on $200 billion worth of Chinese exports on Friday following a breakdown in trade talks between the world’s top two economies.

Related article Farmers get impatient with Trump's trade war: 'This can't go on'

Asian stocks “could be in for an extended period of pain,” said Jeffrey Halley, senior market analyst at Oanda. Equities with a riskier exposure to China “may find it reaches migraine levels,” he added.

Investors around the world fear a protracted trade war in which both the United States and China continue to raise tariffs. US businesses that import Chinese goods pay the tariffs levied by the United States. Companies either eat that cost, which pinches their profits; or they pass the cost onto consumers, which can hurt demand for their products.

“This is a self-inflicted wound that will be catastrophic for the nation’s economy,” said Rick Helfenbein, head of the American Apparel and Footwear Association. Tariffs “are taxes on American consumers that result in higher prices, lower sales, and lost jobs,” he added.

People walk past an Apple retail store in Downtown Brooklyn.

Related article Apple is in a bear market

Meanwhile, China is digging in for a fight.

Ministry of Foreign Affairs spokesman Geng Shuang said Monday that China will “never yield to external pressure,”hours before Beijing announced its latest round of tariffs.

Analysts say markets have to start repricing risk to reflect the new geopolitical reality.

“Even if a deal is signed next week, it is now clear to us that the China-US relationship will be fraught for decades to come” analysts at brokerage firm Jefferies wrote in a client note.

“As China’s economic and geopolitical rise butts up against existing US interests, eleventh hour negotiations and brinkmanship will be a recurring theme which the markets will learn to price in,” they said.