4 Ways US-China Tensions Affect the Stock Market
The ongoing trade war between the United States and China is weighing on the stock market. For the first time since 2005, the yield on a 10-year U.S. Treasury note fell below that of a 2-year note.
Called a yield curve inversion, this is the latest sign that the United States is heading towards a recession. Yield curve inversions have predicted every recession in the past 50 years.
US-China tensions are creating a lot of uncertainty and risk aversion in the stock market. Read on to learn four ways the trade war is affecting the stock market. Explore economic topics such as currency devaluations and tariffs.
1. Currency Devaluation
The decision by the People’s Bank of China to devalue the yuan placed downward pressure on the stock market. In August, China set the yuan’s daily rate below 7 per dollar. This was the first time they had made this move in over a decade.
The intent of China’s currency devaluation is two-fold. The first reason is to gain a competitive advantage. With a cheaper yuan, China’s exports cost less to produce.
The second reason is more malicious and intended to cause harm to China’s economic competitors. Devaluing its currency means goods from the United States are more expensive on the international market. This results in purchasers selecting cheaper Chinese products over American alternatives.
Tariffs are another way in which the US-China trade war is affecting the stock market. To protect its domestic producers, China has a longstanding policy of applying tariffs on American goods.
Believing this practice was unfair to U.S. exporters, President Donald Trump applied retaliatory tariffs on billions of Chinese goods.
This month, the President announced $300 billion in additional tariffs on Chinese goods. Corporations typically pass this fee onto consumers by raising prices.
Higher prices tend to weigh on demand. This leads to decreased sales, which affects the stock market in a negative way.
There are also political and diplomatic pressures on the stock market. For instance, China is condoning American support of protestors in Hong Kong.
Also, China is refusing to allow U.S. Navy ships to dock at its ports. The stock market would crash in the event of a military conflict between the world’s two largest economies and militaries.
4. Risk and Uncertainty
While sales data and cash flow do drive share prices, the stock market is still speculative in nature. Investors monitor global news and seek safety in times of uncertainty and risk. Some choose to convert their shares into cash.
The trade war is producing negative sentiments about stock market growth. Investors fear what the next move could be.
For example, what would happen if the Chinese government decided to sell U.S. government debt? What if the Chinese stopped selling rare earth metals used in popular electronic devices? Questions like these inject fear into the stock market.
A Recap of US-China Tensions
The ongoing trade war is now accelerating recessionary fears. Economic events like currency devaluations and tariffs are placing more downward pressure on the stock market.
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