Why a US-China Deal Won’t Help the Stock Market

Geopolitical risks are fueling market uncertainty. As tense as our relationship with China seems now, there is historical precedence for this level of tension.

We see the U.S.-China relationship as the world’s top geopolitical and economic nexus. Political (an emerging power challenging an existing one) and economic forces (trade and technology transfers) portend greater hostility.

Here are Five Data Points You Need to Know:

1. U.S. President Donald Trump campaigned on taking a confrontational stance on trade with China. Whereas 2017 was a year of trade threats, 2018 is about trade actions.
2. Xi Jinping announced a more assertive approach for China on the global stage at the National People’s Congress (NPC) in October. Legislation to eliminate term limits further consolidates Xi’s control and extends his authority at home and abroad. The “Made in China 2025” plan seeks to achieve Chinese dominance in key technologies and industries.
3. Implementation of U.S. tariffs on the first $34 billion of an expected $50 billion of Chinese imports ratcheted up tensions between the two nations and triggered declarations of retaliation from China. The U.S. announcement of tariffs on an additional $200 billion of Chinese imports followed. A limited agreement to reduce the bilateral trade deficit looks feasible, but the tech sector rivalry between the two superpowers is a fundamental issue.
4. Targeted actions against selected Chinese companies have raised investor anxiety given fears that other entities could come under similar scrutiny. We see a significant risk of supply chain disruption for Chinese industrials and tech companies, as well as a renewed focus by China on indigenous tech development.
5. A high-level U.S. trade delegation to China delivered a broad set of demands with no immediate progress in May, pointing to a lengthy period of negotiations. And China has increased inspections of American products at its ports, causing slowdowns.

*Chart Source: Blackrock, 7/27/2018

With the help of Blackrock, we identified specific words related to this geopolitical risk and use text analysis to calculate the frequency of their appearance in the Thomson Reuters Broker Report and Dow Jones Global Newswire databases as well as on Twitter. We then adjust for whether the language reflects positive or negative sentiment, and assign a score. A zero score represents the average BGRI level over its history from 2003 up to that point in time. A score of one means the BGRI level is one standard deviation above the average. We weigh recent readings more heavily in calculating the average. The BGRI’s risk scenario is for illustrative purposes only and does not reflect all possible outcomes as geopolitical risks are ever-evolving.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Fusion Wealth Management is not affiliated with Kestra IS or Kestra AS.