Things were looking so good for the Dow Jones as it closed above the historic 28,000 level on Friday. This impressive move looked poised to continue next week after another trade war positive headline on Saturday hinted that further progress had been made between the U.S. and China.
Unfortunately for stock market bulls, an explosive New York Times report on China’s “no mercy” approach to its Muslim minority population threatens a sharp rebuke from Xi Jinping’s government, potentially devastating President Trump’s hopes for progress on trade.
The Dow has not relied solely on the Trump administration’s negotiations with China, but there is no question it has been a significant factor in the index’s recovery from 26,000. Despite the expedited progress of the “Hong Kong bill” by the Senate, U.S. trade officials and Xi’s government have managed to retain a steady relationship.
Nothing that has so far happened in Hong Kong is as embarrassing for the Chinese Premier as the NYT’s revelations about the “concentration camps” being utilized in Xinjiang. The question is unlikely to be if China responds, but instead, how aggressive their retort will be.
Theoretically, the U.S. Senate’s bi-partisan bill could now easily be expanded to include more severe condemnation of the Chinese government. Given that the Dow has plenty of good news priced in and is nearing overbought levels on the technical charts, this is not only worrying news for Trump’s hopes of securing a phase one deal before the 2020 election, but also for stock bulls.
In a highly detailed report by Kenneth Rapoza at Forbes, the Senior Contributor makes a strong case that frozen trade talks now seem an inevitable reality, that politicians and equity traders alike will have to face the consequences of,
President Trump and the State Department will unlikely have qualms with a country showing “no mercy” for terrorists. The problem is how China treats the rest of that community, who are not terrorists. This is what will be highlighted from the report and could freeze-dry U.S. China trade talks. The Xinjiang Papers consist of 24 documents and roughly 200 pages of internal speeches by Xi and others, plus over 150 pages of directives and reports on the surveillance and control of the Uighur population in Xinjiang following the terrorist attacks. There are also references to plans to extend restrictions on Islam to other parts of China.
From Nike (NYSE:NKE) to tech behemoth Apple (NASDAQ:AAPL), there are many Dow 30 companies with massive exposure to China, whether it be in manufacturing, sales, or both. Tremendous efforts have been made on both sides of the trade war to ensure that a further escalation of damaging tariffs (planned for December) will not come into effect. Apple CEO Tim Cook is desperate to avoid these import taxes in particular, as a number of them will bite hard on their bottom line. Given that a strong rally in APPL stock has been one of the main engines of the Dow Jones climb to 28,000, anything that threatens Apple, in turn, threatens the entire U.S. stock market.
The leaked Chinese documents show more than enough to provide Xi Jinping with one of his worst PR days in history, and will undoubtedly rally western support for Hong Kong’s independence. The Dow’s road to 30,000 on smooth trade war progress just got dramatically more difficult.
Last modified: January 11, 2020 2:31 PM UTC