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Dow Sweats as Expected Chinese Blowback Emerges to Threaten Rally

Last Updated September 23, 2020 1:18 PM
Joseph Young
Last Updated September 23, 2020 1:18 PM
  • An act that allows sanctions against the Hong Kong government was signed.
  • China warned about taking potential countermeasures, which could endanger a phase one deal.
  • The lack of a deal by the year’s end would threaten the rally of the Dow Jones.

U.S. President Donald Trump’s signing of an act regarding sanctions on the government of Hong Kong may threaten the recent rally of the Dow Jones.

Trump stated :

I signed these bills out of respect for President Xi [Jinping], China and the people of Hong Kong. They are being enacted in the hope that leaders and representatives of China and Hong Kong will be able to amicably settle their differences, leading to long-term peace and prosperity for all.

SCMP reports that a second act was signed to suspend sales of tear gas and rubber bullets  to Hong Kong.

China quickly criticized the U.S ., stating that the government will not hold back in responding to what it described as “gross interference” in internal affairs.

The conflict between the U.S. and China over the ongoing protests in Hong Kong poses a new threat to the progress of a phase one deal. The lack of a deal by the year’s end could slow down the momentum the Dow Jones has seen in the fourth quarter of 2019.

Asia markets react, Dow Jones expected to follow

Following the release of a White House statement, China’s SSE Composite Index and South Korea’s KOSPI dropped  by 0.46% and 0.35% respectively.

The markets are reacting negatively towards an expected move  by the U.S. because several prominent economists have said that the U.S.-China deal is close to being finalized.

While the Dow Jones increased by well over 1,000 points in the past month, its short term trend is still largely dependent on the development of trade discussions.

On Squawk Box Europe, ICBC Standard Bank Chief China Economist Jinny Yan said that China’s top priority in recent months has been stability . A deal with the U.S. would reduce significant pressure off of the People’s Bank of China to balance short term stimuli and long-term growth.

Yan said:

The key priority for (Chinese President) Xi Jinping and policymakers across China is stability, so anything that overthrows stability is going to be essentially a concern. That includes Hong Kong, the U.S.-China situation, and that is why a phase one deal is absolutely crucial.

But, with China describing the actions of the U.S. to have “sinister intentions ,” markets are weighing the possibility of the dispute affecting the signing of a phase one deal.

Strategic move?

According to McLarty Associates senior advisor Steve Okun, Chinese President Xi Jinping is in need of a phase one deal  like President Trump.

Okun noted that President Xi has had several bad weeks throughout November and that he needs a political win for his party.

Source: Twitter 

Given the declining sentiment around China’s economy  since October, the act could test China’s appetite for a deal in the short term, which would shift the trend of the Dow Jones in the coming weeks.