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Dow Collapses Despite Surprising U.S.-China Truce Breakthrough

Last Updated September 23, 2020 2:03 PM
Ben Brown
Last Updated September 23, 2020 2:03 PM
  • The Dow Jones Industrial Average (DJIA) sold off aggressively as the Thursday session matured.
  • Chinese officials struck an optimistic tone overnight, pledging to “grow China-U.S. relations with goodwill and sincerity.”
  • The remarks will settle Wall Street nerves over recent Sino-U.S. relations.

The Dow Jones Industrial Average (DJIA) accelerated its decline in late morning trading on Thursday, falling as much as 500 points after opening to slight losses.

The index was initially saved a deeper plunge by promising remarks out of China overnight . State Councilor and Foreign Minister Wang Yi doubled down on the country’s relationship with President Trump and the U.S.

China’s US policy remains unchanged. We are still willing to grow China-US relations with goodwill and sincerity.

It’s a welcome statement after months of growing tension between the two nations.

Dow dives on Thursday after a volatile overnight session

The optimistic trade truce headlines helped steady stock market futures overnight, but the Dow Jones suffered a big loss after trading opened on Thursday.

By 11:32 am ET, the Dow had plunged 475.44 points or 1.82%, dropping the index to 25,591.84.

dow jones industrial average (DJIA) today
The Dow Jones sold off aggressively as the Thursday session matured. Source: Yahoo Finance

The S&P 500 fell 1.4% to 3,125.64.

Even the Nasdaq swung lower. Despite jumping more than 0.5% in early trading, the tech-heavy index reversed that trend. The Nasdaq last traded at 10,437.43 for a net loss of 0.52%.

The stock market is taking a breather from yesterday’s strong session, which saw the Nasdaq hit another record high.

All three indices were weighed down by a stunning 9.7% plunge from Walgreens, whose results spooked investors . At last check, roughly a quarter of the Dow’s 30 members had reported losses of at least 3%.

Across the Pacific, Chinese stocks enjoyed their eighth-straight day of gains . Gold slid 0.7% after surpassing $1,800 to mark its highest level since 2011.

President Xi committed to U.S.-China partnership

The tone heading into the afternoon session is markedly different from the optimism that pervaded Wall Street after China reaffirmed its commitment to its relationship with the United States.

Wang made his optimistic remarks at a China-U.S. think tank event on Thursday. In an English translation of his statement , he stressed that President Xi is committed to a strong relationship.

President Xi Jinping has underlined on many occasions that we have a thousand reasons to make the China-US relationship a success, and none whatsoever to wreck it.

Wang acknowledged that China and the U.S. face a “severe challenge” in the current climate. President Trump has blasted China over its handling of the pandemic. The phase one trade deal was thrown into doubt . And, just this week, Secretary of State Mike Pompeo threatened to ban TikTok  – the social media app owned by Chinese tech company ByteDance.

With tensions near breaking point, Wall Street will be relieved to hear a conciliatory tone from Chinese officials.

I’d like to stress here again that China never intends to challenge or replace the US, or have full confrontation with the US.

Dow Jones can go higher from here

Despite the ugly turn that Thursday’s trading session took, analysts are optimistic about the second half of the year.

Nupur Gupta, portfolio manager at Eastspring Investments, told Bloomberg this morning that equities can certainly go higher.

If the fundamental data continues to improve from here, and we’ve already seen PMI readings and earning revisions ratios pick up … we actually think the market can continue going up from here in the second half.

She said a combination of central bank liquidity and safe re-openings will spur the S&P 500 and Dow Jones higher in the coming months.

The only risk? If a second-wave becomes “more entrenched” and further lockdowns are required.

What to watch on the stock market today

As always, all eyes are on Thursday’s initial jobless claims data. The Labor Department reported 1.314 million new claims , slightly beating estimates of around 1.4 million filings .

MarketWatch jobs data
Initial jobless claims held above one million this week. Source: MarketWatch

Another 1.3 million unemployed workers may take the shine off last week’s impressive Labor Department report, which saw a surprise jump in new jobs.

Elsewhere, investors are bracing themselves for the most unpredictable earnings season in history. Esty Dwek, head of global macro strategy at Natixis Investment Managers, said Wall Street is scrambling to upgrade targets. A positive sign, but she remains cautious.

We are seeing, so far, pretty much a V-shape [economic] recovery. I think one of the big tests coming up is the Q2 earnings season and whether it is as bad as expected or surprises on the upside like a lot of the economic data has.

The first early results are trickling in this week. The big-hitters are due next week.