2019's Worst Fear Returns

By Nicholas Jasinski |  Thursday, May 21

Pressure Rising. An area of concern for investors has resurfaced in recent days that seems right out of 2019: the prospect of escalating U.S.-China tensions. It has dampened what is otherwise an enthusiastic market focused on economic reopening progress and efforts to develop coronavirus vaccines and treatments.

Yesterday, President Donald Trump took to Twitter to blame China for the coronavirus pandemic, and the Senate passed a bill that would lift hurdles for Chinese companies hoping to list on U.S. exchanges. That follows new restrictions on Chinese tech firm Huawei from late last week that make it harder for it to get access to U.S. parts.

Today, Hong Kong was the center of rising U.S.-China tensions. Beijing's central government indicated it would pursue a new national-security law limiting the territory’s autonomy. U.S. Secretary of State Mike Pompeo warned that could mean Hong Kong loses its “special status” that helps it maintain the title of Asia's financial hub.

And a group of senators said they planned to introduce a bill sanctioning Chinese officials and entities involved. Banks that do business with the sanctioned parties could also be targets.

China, meanwhile, began its annual Chinese People’s Political Consultative Conference after a coronavirus-caused delay. It's the most important political gathering of the year in China, and official pronouncements countering U.S. statements and actions will remain hot while it continues.

“The Trump administration has recently stepped up its rhetoric against China,” Sacha Tihanyi, deputy head of emerging markets strategy at TD Securities, wrote today. “The U.S.-China relationship was already fragile on the trade and technology front, but the relief from the phase-one  trade deal didn’t last long. Covid-19 and the upcoming U.S. election have added fuel to the fire.”

Anyone who has followed the market in recent years recalls the headwind to stock performance that resulted from conflict between the world's two largest economies spilling into the trade arena. Whether the current spat devolves further is yet to be seen. But investors priced in some greater risk of that today. 

Semiconductor stocks sensitive to Chinese manufacturing were among the greatest losers. As were many large industrial companies that both produce goods in China and rely on the market for a large portion of their sales.

The S&P 500 fell 0.8% today, as the Nasdaq Composite lost 1% and the Dow Jones Industrial Average slipped 0.4%. The more domestically oriented small-cap Russell 2000 index rose less than 0.1%.