Tensions Are Rising

By Nicholas Jasinski |  Monday, June 1

Increasing Pressure. Trade tensions are back but for now investors are looking the other way. U.S. stocks closed modestly higher on Monday, despite reports that China was pausing purchases of U.S. agricultural products, undoing a portion of the highly touted phase-one trade deal signed late last year.

The move followed Friday's late-day rebound after President Donald Trump announced several new restrictions on China and its citizens, but nothing major enough to impact the broader economy. Plans included revoking the U.S.'s special treatment for Hong Kong and targeted sanctions against officials involved in crafting a new security law for the territory.

Catching up to Friday's U.S. rally, Hong Kong's Hang Seng index jumped 3.4% today, while the Shanghai Composite rose 2.2%. Back in the U.S., the Dow Jones Industrial Average and S&P 500 each ticked up 0.4%, and the Nasdaq Composite gained 0.7%.

With the coronavirus outbreak and economic gyrations at home occupying investors' attention, rising tensions between the world's two largest economies seems far off and slight in comparison.

But strategists and money managers watching the situation are preaching caution, Barron's Reshma Kapadia wrote today. They cite the potential for geopolitical tumult to increase over the summer, as the U.S. presidential election approaches and neither side is motivated to back down.

Another issue not getting much attention from the market today was the nationwide protests and riots that have gripped the U.S. since the killing of George Floyd. Some businesses and retailers have had to adjust hours or supply chains, but the impact on business won't be known for a while. And whether the large gatherings could lead to a spike in coronavirus cases, necessitating new economically damaging shutdowns, is also still uncertain.

"There is some historical precedent to suggest that this may be another of those events that 'captivates the nation' but is largely ignored by financial markets," CIBC Private Wealth Management's chief investment officer Dave Donabedian wrote in an email today.

He pointed to 1968, a politically and culturally volatile year in which the S&P 500 ended up 11%.

"The assassination of Martin Luther King on April 6 was followed by both peaceful protests and property destruction on a scale greater than what we have seen so far in 2020," Donabedian wrote. "Robert F. Kennedy was assassinated on June 6. In late August, enormous protests against the Vietnam War disrupted the Democratic Convention in Chicago, resulting in violent clashes with police."

Today Donabedian is focused on economic reopening progress and U.S.-China developments. For now, at least, the bullish narrative is taking precedence with investors.