ASX set to tumble below 5,800 as trade war worries bite

"We are witnessing a market in transition, "Tematica Research chief macro strategist Lenore Hawkins wrote. The "synchronised global expansion is rolling over".

ASX futures fell 51 points or 0.9 per cent. On Friday the S&P/ASX 200 shed 116.4 points or 2 per cent to 5820.7.

"Markets have swung from euphoria over tax cuts, to the protectionism pits," TD Securities senior economist Leslie Preston said in a note.

Mr Preston said while the US has legitimate complaints when it comes to China's trade practices - "even a just war has collateral damage" - and many US companies will be hurt if the planned tariffs against Chinese imports come to pass, even if the actions are short-lived.

As noteworthy is the potential indirect effects of a more adversarial global trade environment and "the uncertainty it breeds that could hamper investment and trigger volatility on financial markets", Ms Preston said.

Wall Street-led global sell-off?

Capital Economics' Finn McLaughlin reiterated an argument made in November that a sharp fall in the US stock market would cause equities elsewhere in the world to slump. "And if a sell-off in the US is spurred by fears of a trade war, it only increases the odds of this happening in our view," he added.

"We think that the cumulative effects of Fed tightening will eventually take a toll on the US economy and trigger a sharp decline in the S&P 500 by the end of next year," Mr McLaughlin said. Capital Economics' once-bearish 2600 target for the S&P 500 by the end of 2018 is already in sight. It previously forecast that the S&P 500 would slide to 2300 by the end of 2019.

In light of recent developments, Capital Economics' John Higgins said the firm "will at least have to consider bringing that forecast forward or pencilling in even lower levels".

"We have also argued that a faltering US stock market would be contagious," Mr Higgins said. "Stock markets in emerging market countries with close to ties to China remain especially vulnerable, as do companies around the world which could be affected by Chinese retaliation. And then there are the currency implications to consider. Japan's stock market, in particular, would probably suffer disproportionately if the yen surged."

Fundstrat Global Advisors' Thomas Lee said "multiple" factors have weakened investor confidence and that has had the effect of reducing market liquidity. "As we are all aware, couple this with choppy markets, and markets become challenging short-term, as the resulting buyers' strike further amplifies the worsening market liquidity."

Mr Lee also said "escalating tensions around trade are worrisome, as the US has not engaged in large scale trade wars since the 1930s - which many economists believe worsened the Great Depression. But given the President's pro-business approach, we believe the reach of any trade war is ultimately less than market fears today".

As a result, Mr Lee said he thinks the current pullback will prove to be another 'buy the dip' opportunity.

'Minimal bull capitulation': BofAML

Strategists at Bank of America Merrill Lynch also are hesitant to throw in the towel just yet.

In a review of investment flows dated last Thursday, the strategists said "risk off" positioning surged as noted by $US19.9 billion of equity redemptions in the latest week, paring the previous week's record inflow. In addition, $US1.8 billion flowed into bonds and $US1.5 billion flowed into gold.

The BofAML data also showed that despite Facebook's shares being hammered last week, the tech sector overall attracted more money. And of the 250 analyst recommendations on Facebook, Amazon, Apple, Microsoft, and Alphabet's Google, there were "just" six sells.

So while Facebook shed near 14 per cent last week amid a scandal about the privacy of its users data, there was not a rush to all exits.

BofAML's Bull & Bear indicator slipped to 5.8 as "cross asset euphoria subsides", it also noted, adding the firm's fund manager survey, year to date equity inflows and global wealth management equity allocations indicated "minimal bull capitulation".

As for what to watch to position for further weakness in the S&P 500, BofAML said the US 5-30 year yield curve narrowing to less than 25 basis points, Japan's yen breaking 100, a volatility spike in the Hong Kong dollar, Germany DAX equity index falling decisively below 12,000 and bitcoin retesting $US6000.

At about 4pm Friday in New York, the US 5-30 year yield gap was 46 basis points and the yen stood at 104.84. Germany's DAX closed on Friday at 11,886. Bitcoin, as traded on BitStamp, was trading near $US8600.