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Dow Jones Drops on Report US May Limit Investment in China

Dow Jones Drops on Report US May Limit Investment in China

Peter Hanks, Strategist

Dow Jones Price Outlook:

  • The Dow Jones quickly erased all previously established gains on Friday after a surprise new front in the US-China trade war was opened
  • Stocks with significant dealings in China, like Alibaba and the emerging markets ETF, were hit especially hard
  • The report works to seriously undermine the status of trade relations ahead of scheduled negotiations from October 10 to 11

Dow Jones Drops on Report US May Limit Portfolio Exposure to China

What looked to be a bullish resolution to the week was quickly derailed on Friday after reports were released that the White House is considering limiting domestic portfolio exposure to China. Further, it was reported that President Trump has also pondered delisting Chinese stocks from US indices. The ongoing considerations translated to a severe selloff in US-listed Chinese equities like Alibaba (BABA) and Bidu (BIDU), while also erasing 150 points from the Dow Jones Industrial Average.

Dow Jones Price Chart: 1 – Minute Time Frame (September 27) (Chart 1)

EEM FXI BABA BIDU Chart

The unexpected news equates to a notable escalation in the US-China trade war, just weeks before the two parties are scheduled to meet and negotiate on October 10 and 11. While it has been previously suggested by some market pundits such a move would place severe pressure on China, there was little indication the White House was looking into the decision prior to today. Delisting Chinese stocks like Alibaba and Bidu would serve to remove a massive source of capital for the corporations and would likely hamstring their funding and operations. Consequently, market baskets with exposure to those stocks – and China in general – felt similar pressure.

To that end, the FXI ETF, which offers exposure to Chinese equities, slipped alongside BABA and BIDU. Meanwhile, the EEM emerging market ETF suffered a similar fate as Chinese equities comprise more than 30% of the fund’s holdings. While Chinese-based stocks felt acute pressure, the equity market was not alone in its reaction to the news.

USDCNH Price Chart: 5 – Minute Time Frame (September 27) (Chart 2)

USDCNH Chart

Currency markets felt a similar shock, with USDCNH climbing to its highest level since September 6 – near 7.1519. The pair is often watched as an indicator of US-China trade relations and has been afforded increased emphasis after the People’s Bank of China allowed it to run above the long-standing 7.00 cap on August 5.

Why Now?

Many market participants have questioned why the decision to consider direct limitations on investment in China was floated to the public today. While few can know for certain, a potential catalyst may have been the abysmal earnings report from semiconductor stock Micron (MU) on Thursday which derives a significant portion of their profit from China.

In their quarterly results, the company highlighted a significant decline in revenue from China as sales slip amid the ongoing trade war and Huawei blacklisting. Earlier this week at the United Nations, President Trump took to the stage and vowed to “seek justice for Micron.” Therefore, when it was revealed on Thursday that the company suffered another quarterly breakdown, it may have spurred a more stock-specific trade war focus from the Trump administration.

Either way, the report will do little to improve relations ahead of the scheduled trade meeting on October 10 and 11 – which may likely translate to continued pressure on the Dow Jones and USDCNH in the interim. Until then, follow @PeterHanksFX on Twitter for further updates and analysis of the US-China trade war and its impact on equity markets.

--Written by Peter Hanks, Junior Analyst for DailyFX.com

Contact and follow Peter on Twitter @PeterHanksFX

Read more:Dow Jones Forecast: Nike Earnings to Deliver Trade War & Retailer Insight

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