US-China tensions rocked the Dow Jones on Wednesday, as Wall Street grappled with the realization that a trade deal does not appear to be within President Trump’s grasp.
Analysts remain hopeful that Washington and Beijing are on the verge of reaching a consensus, but snowballing risk factors threaten that bullish narrative.
The US stock market headed for a rare losing session on Wednesday. The Dow Jones Industrial Average shed 54.51 points or 0.2% to fall to 27,879.51.
The S&P 500 declined 4.36 points or 0.14% to 3,115.82. The communication services sector slid more than 0.4%, and six other primary sectors reported losses.
The Nasdaq dipped 14.17 points or 0.17% to 8,556.49.
The CBOE VIX briefly spiked above 13, but a firmer US dollar prevented safe-havens like gold from capitalizing on the volatility in equities. However, bond yields fell as investors sought refuge in risk-off assets. At last check, the yield on the 10-year US Treasury note had declined to 1.755%.
The stock market may have finally succumbed to FOMO, but even Wall Street’s most rabid bulls are struggling to explain away the avalanche of risk factors that threaten the US-China trade talks.
As cautious investors feared, reintroducing tariff rollbacks into the trade negotiations proved to be a fool’s wager. The “phase one” trade deal was designed to target low-hanging fruit, build a base for future agreements, and – most importantly – reassure volatile markets. Now that China put tariff reductions back on the table, the Trump administration wants other thorny issues back on the table too.
The trade war’s second calendar year is quickly coming to a close, and US-China relations are rapidly sliding back toward an intractable stalemate. But markets won’t have long to adapt to this “new normal.” New tariffs are scheduled to take effect in less than four weeks, and President Trump says he’ll keep raising import duties until China caves to his demands.
“China is going to have to make a deal that I like,” Trump said Tuesday. “If we don’t make a deal with China, I’ll just raise the tariffs even higher.”
Simmering Hong Kong tensions have only added more pressure to the Dow Jones. Congress has fast-tracked a bipartisan bill to support the anti-government protesters, and Trump may have no choice but to sign it – even if he would rather ignore the protests until after he has a trade deal in writing.
Beijing continues to forcefully rebuke the US government for “interfering” in Hong Kong, even unleashing the ominous – and rarely used – “Don’t say I didn’t warn you” threat that carries so much weight on the mainland.
However, those may be empty threats. A new Nomura Research Institute note argues that while Beijing might prefer to punish the US for its stance on Hong Kong, the Chinese government can’t afford to continue waging a costly trade war. China’s economy is already slowing. Striking a trade deal would accomplish the twin goals of easing pressure on exports and allowing the government to focus on domestic policy.
“I suspect the increasingly pronounced slowdown in China’s economy, coupled with recent employment data pointing to continued strength in the US economy, are putting heavy pressure on China to settle sooner rather than later,” Richard Koo, chief economist of the Nomura Research Institute, wrote in the note.
According to Fitch Ratings, the phase one trade deal would help China combat its economic slowdown, which threatens to plunge growth below 6% in 2020. While still quite large compared to the US, that growth rate would be China’s worst since the government began keeping records in 1992.
The White House also has clear incentives to sign a trade deal.
As the impeachment saga rumbles on, President Trump could use a political victory to buttress his case that he is strengthening America’s geopolitical position despite facing a deluge of frivolous Democratic assaults.
Moreover, a trade deal would likely add even more fuel to a stock market that’s currently sitting just below all-time highs.
Perversely, the fact that both China and the US desire to reach a trade agreement may be a bearish indicator. Both governments need a deal, but nearly two years into the trade war, they’ve proven unable to reach a consensus on anything beyond their wish to reach consensus.
This article was edited by Sam Bourgi.
Last modified: November 20, 2019 14:47 UTC