Rising tension between the United States and China, the world’s two largest economies, pose a real threat to stocks, which had shot up in April as investors looked toward an economic recovery.
The blame game over the coronavirus pandemic is feeding tensions between Washington and Beijing, which had put aside their two-year-old trade dispute as the pandemic plunged the world into a sharp recession.
The dynamic is now changing. US Secretary of State Mike Pompeo stepped up efforts to blame China on Sunday, claiming there is “enormous evidence” that the virus originated in a laboratory in Wuhan and not a market. The US intelligence community previously said that the coronavirus is “not manmade or genetically modified.”
And President Donald Trump said Sunday that tariffs would be “the ultimate punishment” for China over its handing of virus, sending global stocks lower on Monday.
“Such statements indicate that Sino-American relations are about to get worse,” Hussein Sayed, chief market strategist at FXTM, a currency broker, told clients Monday. Deutsche Bank’s Jim Reid said the dynamic is “very much one to watch,” noting the strong reaction from investors the last time trade relations deteriorated.
The global economy is already facing its most severe contraction since the Great Depression due to the lockdowns aimed at controlling the spread of the novel coronavirus. Tariffs would add serious strain as companies fire their global supply chains back up and try to get their businesses going again.
For now, investors are eyeing the prospect of fresh duties with some skepticism, noting that they would likely hit US consumers hard at a painful moment. That could be problematic ahead of the election in November.
“An even more restrained economic recovery and more elevated uncertainty among households and businesses does not sound like an election winner,” Holger Schmieding, chief economist at Berenberg Bank, told clients Monday.
But the US-China relationship clearly remains a key risk as investors look toward an eventual economic recovery, which they’re betting will kick off in the second half of the year.
