• The U.S. State Department reportedly ordered China to close down its consulate in Houston, Texas.
• The U.S. stock market fell in pre-market trading after the State Department’s decision was reported.
• Geopolitical risks are now the greatest threat to equities, some strategists say.

The soaring U.S. stock market is slowing down in pre-hours trading. Stocks fell immediately after the State Department reportedly ordered China to shut down its consulate  in Houston, Texas.

Stocks were initially rallying in the pre-market trading session despite President Trump’s warning about the virus.

President Trump says he foresees a worse phase of the pandemic  in the near-term before it improves:

It will probably unfortunately get worse before it gets better.

When President Trump’s statement was first released, the U.S. stock market remained relatively stable. The Dow Jones Industrial Average started to decline when the State Department’s order to China was first reported.

Investors’ diverging reaction to virus forecasts and geopolitical risks suggest the pandemic is likely priced into the market.

Pandemic no Longer the Biggest Threat to the U.S. Stock Market

The pandemic seems to be priced into the stock market, but not worsening U.S.-China relations. 

The recent trend in equities indicates that geopolitical risks pose the greatest threat to markets in the intermediate-term.

Investors remained resilient, even toward a gloomy outlook about the pandemic. The sentiment in the stock market changed when Beijing vowed retaliation against the U.S.

According to reports, China said it would implement countermeasures  if the U.S. does not reverse its decision.

Earlier this week, market analyst Ed Yardeni, who is known for his bullish predictions, warned of a new market downturn. There are positives in the market, such as relaxed financial conditions, but Yardeni pinpointed geopolitical risks as the biggest threat. 

Yardeni said a market meltdown could occur to the tune of a 20% to 30% correction. The virus and worsening U.S.-China relations were cited as the primary catalysts.

Declining sentiment around the stock market does not come as a surprise. Many investors expected the U.S. government to focus on economic recovery  and delivering sufficient stimulus to the markets. Although this could be good for Americans in the short term, it has negative implications for equities.

Yardeni said:

There is concern that such a radical change in policy making—particularly with more government spending on more government programs including regulation could be a negative for the stock market.

China Has Been Preparing Against a Bigger U.S. Clampdown

Bloomberg reports that more Chinese technology giants are exploring domestic listings.  It follows Chinese President Xi Jinping’s strategic decision to lead a stock market reform  in 2018.

Rather than conducting initial public offerings (IPOs) in the U.S., domestic IPOs reduce the threat of direct sanctions.

Semiconductor Manufacturing International Corp (SMIC), as an example, had a $7.6 billion IPO in Shanghai . The biggest listing in China in more than a decade sent a clear message to the U.S.

The increase in local listings signals China’s efforts to reduce its dependence on U.S. markets. It also hints at worsening U.S.-China relations, especially in the post-pandemic era.