The U.S. stock market whipsawed overnight, erasing a heap of gains ahead of the opening bell. Despite an initial bounce in the futures market, the Dow Jones turned bearish after China yanked a key part of the phase one trade deal.
As Bloomberg reports, Chinese government officials have ordered state-run agriculture firms to halt U.S. purchases including soybeans and pork.
State-owned traders Cofco and Sinograin were ordered to suspend purchases… Chinese buyers have also cancelled an unspecified number of U.S. pork orders.
The move is believed to be retaliation for the White House’s latest stance over Hong Kong. Chinese agriculture purchases are a crucial part of the Sino-American trade deal, throwing the entire deal into disarray.
A wild night for the futures market turned into a disappointing day for U.S. stocks. All of this comes off the back of a weekend of civil unrest across America. Ongoing protests turned violent in many U.S. cities, including Washington D.C.
As of 9:53 am ET, the Dow Jones had lost 19.97 points or 0.08%, pushing the index down to 25,363.14. The DJIA had fallen more than 100 points immediately after the opening bell.
The S&P 500 also recorded slight losses, dipping 0.06% to 3,042.57.
The Nasdaq managed to tick 0.12% higher to 9,500.95.
While stocks have rallied in the face of ongoing domestic crises, analysts agree that China tensions could still blow a hole in this market. Bloomberg reporter Dani Burger noted this morning that China was the biggest worry for the strategists she spoke to.
The real risk here is stocks exposed to China… US stocks that have a lot of sales, where they sell to China, or China exposure in general have outperformed from the bottom so this is the real risk. If we get increasing tensions, those stocks have done extremely well so they might fall back down to earth.
The White House has increasingly ramped up the rhetoric on China in recent weeks. Last week, Mike Pompeo stoked tensions by declaring that Hong Kong was no longer politically autonomous from China. That might sound like a small distinction, but it allows the White House to yank Hong Kong’s special trade status. It was a provocative move that angered China. As Iris Pang at ING commented at the time:
China will retaliate on this. It’s more the Chinese retaliation that I’m waiting for and worried about, because I don’t know how they will retaliate.
Well, China retaliated. The decision to halt U.S. agriculture purchases is the slap-back many investors feared.
The stock market was heading for a positive open this morning before the China selloff at 4:40 am. It suggests that traders were broadly unfazed by the ongoing protests and riots across the country this weekend. As Burger explained, that shouldn’t come as too much of a surprise:
We saw in the 1960s that civil unrest doesn’t always lead to turbulence in the market.
Markets can easily shrug off civil unrest and focus on the bigger picture. However, the scope of the protests throughout America is staggering. Demonstrations broke out in 140 cities this weekend. The National Guard was deployed in 21 states.
In Washington D.C., the White House went dark as protests turned violent. In a rare move, the external lights were turned out as fires raged near Washington Monument. The authorities imposed an 11 pm curfew while U.S. Marshals and the Drug Enforcement Administration arrived to assist the National Guard.
Although the riots didn’t trigger an immediate drop in the Dow Jones or S&P 500, traders are beginning to price in more volatility. The VIX, which tracks expected volatility in the S&P 500, is showing a huge spike in October options positions.
If one thing is going to have a really big impact right now, it’s political risk. And you can see that very clearly when you look at the VIX curve… Investors bidding up [October options] for the election period… That right there is political tension that keeps getting priced in, especially over the weekend – Dani Burger.
In other words, the riots are causing traders to hedge their risk going into the November election.
Last modified: June 1, 2020 1:57 PM UTC