USA, China, And The S&P500 Index
The Chinese government has now demonstrated an ability to control the S&P500 Index, even at the risk of Chinese domestic capital flight.
While each side in this trade war/currency war/cold war faces unique pressure, there is no doubt, you would think, that the U.S. might be able to sustain for longer a period of sub-optimal reality. After all, the Chinese economy now grows at the slowest pace in 27 years, and that’s if one trusts their data. The U.S. president faces the prospect of reelection (or not) in November of 2020. A deal must not only work in the long run, but it must also appear beneficial at the time of the agreement. The Chinese president prepares for the 70th anniversary of the Communist regime’s victory over Nationalist forces in October. He must appear to be strong and must appear to be in control. That implements an increased regimen of tariffs by President Trump by a deadline of September 1st a sticky situation. White House Economic Adviser Larry Kudlow speaks of “planning for the Chinese team to come here in September.” How much give do you think there will be in September with the Communist Party’s big shindig planned for the very next month?
Do you know what provoked the current USA market big selloff?
The PBOC (China’s central bank) allowed the yuan to fall to more than a 7 to 1 exchange rate versus the US dollar. You also know what caused short sellers to cover their positions on Tuesday. The PBOC stabilized that same yuan. Understand just how dangerous that is, and for the most part, the financial media missed it; USA China Can Affect The S&P500 Index. The Chinese government ahead of these scheduled meetings, ahead of their high-level event and during (albeit early) a U.S. national campaign season, has now demonstrated an ability to control the S&P500 index, even at the risk of Chinese domestic capital flight. This is not just flying a strategic bomber over an uninhabited island, or a Coast Guard cutter sailing through the Straight of Taiwan, this is a threat that must be countered in some way.
Do you know that the US represents only about 20% of the total trade picture for China?
Trump is working off of the old-school ideas of trade that have not been updated in universities since the Great Depression. A 12% correction down to the 24000 in the Dow Jones Industrial stock index will give Trump something to think about. If I were Trump’s Democratic opponent, I would be hitting him over the head with his nonsense over China. They have pulled back on buying agricultural products and that is driving a stake in the heart of Trump territory as well. He is sacrificing the commodity sector for what? Manufacturing? Sorry. That train left the station a long time ago.
Trump needs to understand that whichever Democratic candidate he faces, his trade war with China is going to be a major issue. Without a correction in the US share market of 10%-12%, any hope of a settlement of this trade dispute is unlikely to be forthcoming until after January 2020. If Trump is smart, he should be postponing the imposition of any new tariff for they do not work! Negotiating in Asia is entirely different from that in the USA, Europe, or even Australia/New Zealand. This semblance of stability will most likely recharge global risk sentiment and revive investor appetite for global stocks, although not necessarily emerging-markets.