By CCN.com: The Dow Jones has shown strong momentum from May 2 to 3, recording a recovery of nearly 300 points in merely two days. However, U.S. President Donald Trump’s decision to raise tariffs on $200 billion worth of Chinese goods could hinder the performance of the U.S. equities market.
Intensifying Geopolitical Tension Poses Risk on Dow
Throughout the past two months, many strategists were optimistic towards the short-term future of the Dow and the rest of the U.S. equities market due to strong fundamental factors that can sustain the momentum of stocks.
The strong performance of tech stocks like Microsoft and finance stocks such as BlackRock further fueled the confidence of investors in the market as the two key industries led the U.S. economy to engage in a powerful start to 2019.
The Federal Reserve’s decision to maintain the current benchmark interest rate until the year’s end despite signs of economic growth as seen in the rapidly declining unemployment rate served as the primary catalyst for the Dow’s recovery in April.
But, the U.S.-China trade deal always remained an unknown variable that could gear the Dow towards the downside or the upside. With virtually every important fundamental factor laid out for the U.S. equities market to bounce off of, a comprehensive trade deal has been expected to lead to a big rally for the Dow.
On May 5, U.S. President Donald Trump stated that the U.S. government will impose a higher tariff on $200 billion worth of Chinese goods, raising the tariff from 10 percent to 25 percent.
For 10 months, China has been paying Tariffs to the USA of 25% on 50 Billion Dollars of High Tech, and 10% on 200 Billion Dollars of other goods. These payments are partially responsible for our great economic results. The 10% will go up to 25% on Friday.
325 Billions Dollars of additional goods sent to us by China remain untaxed, but will be shortly, at a rate of 25%. The Tariffs paid to the USA have had little impact on product cost, mostly borne by China. The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!
In recent months, China and the U.S. are said to have discussed key roadblocks in the trade deal such as enforcement strategies and the request of the U.S. government to alter the industrial policy of China.
Speaking to the WSJ, Cornell University economics professor Eswar Prasad said that the latest threats of Trump will complicate the trade discussions and could potentially worsen the relationship between the two nations.
“Trump’s latest threats will further complicate the negotiations and heighten distrust between the two sides as they try to work through their differences and hammer out a deal. Trump has upped the ante yet again, blindsiding the Chinese who thought they were negotiating towards a pullback of existing tariffs, not fending off new ones,” Prasad said.
The Dow Looking for a Bloody Start
According to several reports, the Dow futures have plunged by more than 500 points following the release of Trump’s statement.
The Dow showed signs of a weakening footing after Trump’s Stephen Moore, President Trump’s Fed pick, pulled out of from being considered for a spot on the Federal Reserve Board of Governors.
The intensifying geopolitical tension between the U.S. and China, which is said to have been one of the main catalysts for the Dow’s poor performance in early 2019, is expected to have a negative impact on the near-term trend on stocks.