Will China’s ‘Nuclear Option’ Blow Up the Dow Jones Rally?

A new Chinese law, dubbed the 'nuclear option' will anger Washington and could spark a fresh round of retaliation between Trump and Beijing. That's not what investors want to hear.
Posted in: Markets
Published:
May 28, 2020 11:59 AM UTC
  • The Dow Jones Industrial Average (DJIA) has had a heck of a week, despite trading flat on Thursday.
  • China approved a controversial new security law over Hong Kong Thursday morning as White House threatened sanctions.
  • Investors are nervous about Beijing’s next move – ‘China will retaliate on this.’

The Dow Jones traded flat on Thursday as the U.S. stock market reversed its opening bell pop. Despite the small pullback, the index has soared this week – even amid renewed tensions between the U.S. and China.

China’s National People’s Congress approved a controversial security law over Hong Kong in the early hours of Thursday morning. Dubbed the ‘nuclear option’, it extends power over Hong Kong.

In no uncertain terms, the White House has come down hard on Beijing over this, threatening to yank Hong Kong’s special trade status.

Iris Pang at ING is now concerned about China’s inevitable response:

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.

The latest flare up in tensions could put a dent in the week’s blistering stock market rally. And it threatens to blow up the delicate phase one trade deal between the two nations.

Dow clings to big weekly rally

U.S. stocks shot higher at the opening bell, though they quickly receded in the minutes that followed.

As of 9:54 am ET, the Dow Jones had edged 77.46 points or 0.3% higher to 25,625.73.

The Dow Jones Industrial Average (DJIA) continues to trend higher this week. | Source: Yahoo Finance

The S&P 500 and Nasdaq made comparable moves, rising 0.23% and 0.12%, respectively.

China’s ‘nuclear option’ in Hong Kong, explained

The new law, often referred to as the ‘nuclear option‘ allows Beijing to quash unrest in Hong Kong in a bid to reign in the ongoing protests.

But the White House believes it’s a Chinese power grab; an attempt to exert more control over Hong Kong. Pompeo was pretty clear when he told Congress that “no reasonable person” can claim Hong Kong still has autonomy.

Congress could now yank Hong Kong’s special trade status. A move that would choke investment in the region and rile up Beijing.

Brace for stock market jitters

Make no mistake, this is a blow for U.S.-China relations. Speaking to Bloomberg, Craig Allen, head of the US-China Business Council, said:

Secretary Pompeo’s announcement today is a big step… I would agree with you on both sides things are getting a little bit more testy and a little bit more tense.

Allen said the implications on trade and monetary policy aren’t yet clear, but “the signs are quite worrying.”

Zhaoyin Feng at the BBC agreed that the move will roil Beijing and erode the already frayed relationship. China is likely to retaliate to any threat from Washington and could spark another tit-for-tat battle.

The Dow Jones bull case?

Not all investors are worried about the renewed China tension. Stefan Hofer of LGT Bank Asia said it may not amount to much more than angry rhetoric. There’s no way Trump will risk the phase one trade deal, according to Hofer.

While the temperature is being raised on Beijing as we move forward, the phase one trade deal, we assume, is not going to be put in jeopardy.

The trade deal with China plays too well with Trump’s base, argues Hofer, and he needs that support going into the 2020 election. The hot-air between Washington and Beijing may bring some volatility to the market, but it’s not yet a death blow.

Samburaj Das edited this article for CCN.com. If you see a breach of our Code of Ethics or Rights and Duties of the Editor or find a factual, spelling, or grammar error, please contact us.

Last modified: May 28, 2020 1:57 PM UTC

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Ben Brown @_ben_brown

Ben is a journalist with a decade of experience covering financial markets. Based in London, UK, his writing has appeared in The Huffington Post and he was Chief Editor at Block Explorer, the world's longest-running source of Blockchain data. Reach him at benjamin-brown.uk or on Twitter at _Ben_Brown. Email ben @ benjamin-brown.uk.