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Dow Futures Jump but China’s ‘Nuclear Option’ Could Blow Up the Rally

7 min read

  • Dow Jones Industrial Average (DJIA) futures point to yet another strong rally on Wall Street Thursday.
  • China approved a controversial new security law over Hong Kong Thursday morning as White House threatened sanctions.
  • Investors are nervous about the Beijing’s next move – ‘China will retaliate on this’

The Dow Jones continues its rampage higher on Thursday despite renewed tensions between the U.S. and China. Dow futures are set to open 143 points higher today.

China’s National People’s Congress approved a controversial security law over Hong Kong in the early hours of Thursday morning. Dubbed the ‘nuclear option’, it extends power over Hong Kong.

In no uncertain terms, the White House has come down hard on Beijing over this, threatening to yank Hong Kong’s special trade status.

Iris Pang at ING is now concerned about China’s inevitable response:

China will retaliate on this. It’s more the Chinese retaliation that I’m waiting for and worried about, because I don’t know how they will retaliate.

The latest flare up in tensions could put a dent in the week’s blistering stock market rally. And it threatens to blow up the delicate phase one trade deal between the two nations.

Dow futures continue the rally

Dow futures look set to extend the week’s gains, up 143 points (0.5%) going into the open. The move comes ahead of new jobless claims data, due at 8.30am ET. The numbers are expected to rise a further 2.1 million, bringing the total to more than 40 million since the crisis began.

Dow Jones Industrial Average (DJIA) futures look to extend the week’s monster rally. Source: Yahoo Finance

The S&P 500 futures are up 0.18% in early trading, jumping back above 3,000 after a brief wobble yesterday. Nasdaq Composite futures, however, turned negative (down 0.15%) as the tech rally fades.

China’s ‘nuclear option’ in Hong Kong, explained

The new law, often referred to as the ‘nuclear option‘ allows Beijing to quash unrest in Hong Kong in a bid to reign in the ongoing protests.

But the White House believes it’s a Chinese power grab; an attempt to exert more control over Hong Kong. Pompeo was pretty clear when he told Congress that “no reasonable person” can claim Hong Kong still has autonomy.

Congress could now yank Hong Kong’s special trade status. A move that would choke investment in the region and rile up Beijing.

Brace for stock market jitters

Make no mistake, this is a blow for U.S.-China relations. Speaking to Bloomberg, Craig Allen, head of the US-China Business Council, said:

Secretary Pompeo’s announcement today is a big step… I would agree with you on both sides things are getting a little bit more testy and a little bit more tense.

Allen said the implications on trade and monetary policy aren’t yet clear, but “the signs are quite worrying.”

Zhaoyin Feng at the BBC agreed that the move will roil Beijing and erode the already frayed relationship. China is likely to retaliate to any threat from Washington and could spark another tit-for-tat battle.

The Dow Jones bull case?

Not all investors are worried about the renewed China tension. Stefan Hofer of LGT Bank Asia said it may not amount to much more than angry rhetoric. There’s no way Trump will risk the phase one trade deal, according to Hofer.

While the temperature is being raised on Beijing as we move forward, the phase one trade deal, we assume, is not going to be put in jeopardy.

The trade deal with China plays too well with Trump’s base, argues Hofer, and he needs that support going into the 2020 election. The hot-air between Washington and Beijing may bring some volatility to the market, but it’s not yet a death blow.

This article was edited by Samburaj Das.

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