Eight countries led by the U.K. and the members of the European Parliament have formed a unique new coalition to counter China . The unity of American allies reduces the threat of an abrupt stock market downturn.
The fight against China and its handling of Hong Kong is no longer exclusive to the United States. The Inter-Parliamentary Alliance on China formed by 19 ministers suggests Europe, beyond the U.K, is backing the U.S. against the Chinese government.
The participating nations include Australia, Canada, Germany, Japan, Norway, Sweden, the U.K, and the U.S.
In the past week, the U.S. imposed additional sanctions on China, placed pressure on state-run media outlets, and threatened to cut off access to Chinese airlines.
Despite strong countermeasures against China, the U.S. stock market sustained its momentum. The Dow Jones Industrial Average (DJIA) surged by a staggering 13% since May 13.
So far, the U.S. stock market has not reacted to mounting geopolitical risks and rising tensions between the U.S. and China.
It indicates investors do not perceive the degrading relationship between the two countries as a real threat to equities.
The trend also suggests investors expect U.S.-China relations to worsen over time.
When the stock market prices in a long-lasting dispute against China, any minor resolution can massively benefit equities.
A unified stance against China among some of the largest economies in the world means the Chinese government cannot react prematurely.
Australia’s Victorian Labor Senator Kimberley Kitching said :
The world is seeing an increasingly assertive China; and in Australia, we have become increasingly aware that the way we deal with authoritarian regimes cannot be the same as the way we deal with democracies.
If the Chinese government imposes harsh measures on the U.S., it may lead to retaliatory actions from the U.K., Australia, and other countries taking part in the coalition.
For that reason, both the U.S. and China are likely to avoid an all-out economic war , as Oxford’s Blavatnick School of Government dean Ngaire Woods predicted in 2018.
The coalition will make it more difficult for China to implement sanctions or strict measures against American companies.
In the near-term, the unity among U.S. and its allies can positively fuel the momentum of the stock market.
Pre-market data shows the Dow Jones is set to open with a 354-point gain, a 1.32% increase after a month of rallying.
U.S. banking giant Morgan Stanley believes the U.S. will not want to break apart the phase one deal with China.
The U.S.-China tensions intensified in recent weeks, but the Trump administration has an incentive to aid economic recovery ahead of the Presidential election in November.
Chetan Ahya, Morgan Stanley’s chief economist, said:
[The Trump administration] would be focused on economy right now and will not want to break the phase one deal.
Increasing pressure on China from Europe’s key economies and the growing confidence of investors may mean the U.S. stock market set for a continued rally in the second half of 2020.