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Dow Rampages as ‘Hidden Capital Flight’ Betrays China’s Trade War Angst

Last Updated September 23, 2020 1:07 PM
Josiah Wilmoth
Last Updated September 23, 2020 1:07 PM

The Dow rampaged toward a titanic gain on Friday after President Donald Trump appeared to lay the foundation for an “early harvest” trade deal that would solve minor disagreements and prevent the trans-Pacific tariff war from escalating any further.

Adding to the optimism surrounding a possible trade deal, a new report revealed that China’s “hidden capital flight” has spiked to record highs as US tariffs roil its economy.

Dow Skyrockets as Trade Talks Progress

US stock indices surged at Friday’s opening bell. The Dow Jones Industrial Average (INDEXDJX:.DJI) soared 333.24 points or 1.26% to 26,829.91. The Dow now looks poised to close the week in positive territory, despite steep losses on Monday and Tuesday.

dow jones industrial average chart
The Dow’s weekly candle flipped green after Friday’s massive opening bell jump. | Source: Yahoo Finance

The S&P 500 (INDEXSP:.INX)  jumped 35.07 points or 1.19% to 2,973.20. The index had slipped below 2,900 earlier in the week. Ten of 11 primary sectors reported gains, led by financials (+1.76%), industrials (+1.76%), and technology (+1.61%).

The Nasdaq (INDEXNASDAQ:.IXIC) led the market, rising 105.78 points or 1.33% to 8,056.56.

Beijing & Washington Set the Stage for an ‘Early Harvest’ Trade Deal

The Dow and its peers sped higher ahead of President Trump’s White House meeting with Chinese Vice Premier Liu He, Beijing’s top trade negotiator.

Despite earlier doubts, investors now expect this week’s round of trade talks – the 13th since the trade war began – to produce a so-called “early harvest” trade deal  that addresses minor issues while leaving thornier matters for future discussions.

According to multiple reports, the partial agreement  will likely include a previously-discussed currency deal, increased agricultural purchases, and a suspension of new tariffs  – including two rounds of tariffs scheduled to go into effect next week and in December.

Even a limited trade agreement would be welcomed on Wall Street, though previous tariff truces haven’t brought Beijing and Washington any closer to striking the full trade agreement investors have long anticipated.

Chinese Capital Flight Surges 19% in 2019

dow jones industrial average
Wall Street is optimistic the US and China will strike a limited trade agreement in the near future. | Source: Spencer Platt/Getty Images/AFP

Beijing has sought to maintain a posture of strength and leverage Trump’s political circus against him. However, the trade war has added further pressure to a weakening Chinese economy.

Against this backdrop, Bloomberg reports that China’s “hidden capital flight” surged to a record high  of $131 billion in the first half of 2019 as residents used unrecorded transactions to evade strict capital controls and shuffle wealth out of the Chinese market.

“Net errors & omissions” in China’s balance of payments had averaged around $80 billion over the first half of the previous few years. However, the devaluing of the yuan  has led more residents to park money offshore.

Altogether, China is estimated to have suffered $226 billion in outflows through July, a year-over-year increase of 19%.

Consumer Sentiment Data Will Provide More Insight into State of US Economy

Today’s US economic calendar revolves around the release of the University of Michigan’s Consumer Sentiment Index at 10 am ET. Consumer confidence has waned in recent months, with August’s reading missing economist estimates by a wide margin. Analysts forecast a reading of 92, a slight decline from September’s revised print of 93.2.

Boston Federal Reserve President Eric Rosengren will speak at the American Economic Challenges Symposium 1:15 pm ET. Rosengren ranks among the FOMC’s most hawkish voters, and he opposed both interest rate cuts the bank has adopted at its last two policy meetings.

The FOMC next meets at the end of October, and the market has priced in a significant probability of a third straight interest rate cut.

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