Home Markets News & Opinions Markets Opinion Forget Covid-19, It’s China the Stock Market Should be Worried About

Forget Covid-19, It’s China the Stock Market Should be Worried About

Laura Hoy
Last Updated October 4, 2020 4:49 PM
  • Coronavirus and the presidential election are short-term stock market drivers.
  • Investors should keep a close eye on U.S. relations with China as they could deteriorate in the years ahead.
  • Increasing tension could have a longer-term negative effect on equities.

Since March, the novel coronavirus has dominated the headlines and driven the stock market. Now that the president has confirmed he’s infected, it’s a tie whether the upcoming presidential elections or the virus itself is driving investor sentiment.

Investors focused on those events are short-sighted. There’s another downside catalyst casting a dark shadow over financial markets: China.

stock market, S&P 500, investing
The stock market has been on a wild ride this year, but once the chaos clears, investors will see the real threat is China. | Source: Yahoo Finance 

Stock Market Facing Long-Term China Risks

Unlike the pandemic and the election, the effects of U.S.-China tensions could weigh on the market far into the future—especially if it develops into a full-blown cold war.

Darren Tay of Fitch Solutions cautioned last week that the two nations are on the verge of an all-out cold war that could ultimately tank financial markets and create years of uncertainty around the globe :

By a new cold war, I mean an all-out, perhaps generation-long, global economic, military and ideological struggle that could lead to a bifurcation of large parts of the world into a pro-US bloc and a pro-China bloc with significant numbers of countries caught in between.

While that might sound extreme, tensions between Beijing and Washington over the rollout of 5G offers a glimpse into what Tay is talking about.

Earlier this year, the U.S. said it wouldn’t allow China’s Huawei Technologies to supply the nation with 5G connectivity. Officials cited the risk of espionage as a reason for blocking Huawei’s 5G equipment. Watch the video:

It didn’t end there. U.S. Secretary of State Mike Pompeo seemingly threatened to scale back partnerships  with some of America’s NATO partners if they didn’t take a similar stance on Huawei.

While some European nations went ahead with their planned Huawei partnerships, the U.K. sided with the U.S. in banning the use of the Chinese firm’s components . 

A similar battle is emerging with social media platform TikTok, which Donald Trump has accused of being Chinese spyware. Last week, Treasury Secretary Steve Mnuchin confirmed that if the company didn’t migrate all of its code to be stored in the U.S., it would be banned . A similar trajectory, in which the U.S. calls on allies to do the same, could result if TikTok doesn’t comply. 

What’s Next?

Tension between the U.S. and China is nothing new, and neither is its effect on the U.S. stock market. In 2019, the trade war between the countries was responsible for wild swings in the market. 

That could be true in 2021 as well, especially if Donald Trump is reelected. Not only because the president has taken a hardline stance against Beijing, but because he’s very vocal about it on Twitter.

Trump has become a huge driver of the stock market with his constant tweets, and those about China specifically have proven to be bad news for investors.

Data gathered by Exness shows that, regardless of sentiment, when Trump tweets about China, the S&P 500 closes an average of 0.29% lower. 

Donald Trump, Trump tweet, Trump china
When Donald Trump tweets about China, it’s bad for the stock market. | Source: Exness 

Ultimately, we can expect a Trump presidency to be dominated by market-moving tweets. Once China comes back into view, that’s a bad thing for the stock market.

Biden’s China Stance Isn’t Any Softer

Joe Biden has been critical of Donald Trump’s tariffs, but he claims he’ll also take a hard line on China regarding intellectual property theft and international trade. Watch the video:

In a rare moment of policy discussion during the presidential debate, we saw both candidates take a hardline stance on China. Biden criticized Trump for being too soft on Beijing during the coronavirus outbreak, underscoring the likelihood that a Biden presidency would offer a strained relationship with China as well. 

Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author has no position in any of the securities mentioned.