Investors Skittish Ahead of Expected Sanctions on China

Wall Street is starting to feel the sting of U.S.-China tensions, as investors await President Trump’s announcement on potential sanctions later Friday. 

MANHATTAN (CN) — The huge rally earlier in the week now a distant memory, markets slipped on Friday as investors anxiously await the U.S. president’s press conference on rising tensions with China.

Already on the rocks this past month over the handling of the Covid-19 pandemic, relations between the two countries got worse on Thursday when China’s congress approved its proposal to impose new security laws banning secession and foreign interference in the territory. 

The new law, the text of the which has not yet been made public, grants China broad powers in Hong Kong and threatens to end the “one country, two systems” policy that has been in place since 1997. That policy recognized Hong Kong as part of China but allowed the city to keep its own administrative systems and capitalist economy.

Wall Street had been riding the high from Memorial Day after most states began to open up, gaining 1,000 points in two days of trading and largely ignoring the disturbing news out of Hong Kong. That seemed to shift on Thursday, however, when President Trump announced just before the closing bell he would hold a press conference the next day.

At Friday’s opening bell, the Dow Jones Industrial Average dropped 130 points, while the S&P 500 and Nasdaq remained relatively flat.

Markets abroad also fell on Friday. In Asia, only Shanghai and South Korea’s markets had any kind of positive gain, with Australia’s ASX 200 slipping 1.63% and Hong Kong’s market dropping 0.74%.

European investors similarly turned bearish on Friday, with most markets down at least half a percentage point by 8:30 am EST. The pan-European Stoxx 600 had fallen even further, down 1.8% by that time.

“All focus today will be on pre-positioning ahead of U.S. President Trump’s announcing new policies related to China,” Stephen Innes, chief global markets strategist at AxiCorp, wrote in an investor’s note. “

The United States has already taken several steps to try to rein in China, including adding two dozen foreign companies to its “Entity List,” which prohibits them from exporting or transferring certain items, scrutinizing four state-controlled telecommunications companies, and expelling Chinese graduate students with ties to China’s military.

On Wednesday, U.S. Secretary of State Mike Pompeo also decertified Hong Kong as no longer autonomous, noting that “it is now clear that China is modeling Hong Kong after itself.”

Most Western countries condemned the new law and reiterated their support for the “one country, two systems,” policy. Foreign ministers from several European countries are scheduled to meet Friday to discuss the situation with China. Japan and Taiwan also decried the move. Russia has criticized the Trump administration for what it says is meddling in China’s internal matters.

The U.S.-China Economic and Security Review Commission, a bipartisan congressional commission, welcomed Pompeo’s decision as “a first and necessary step demonstrating support for the rule of law and the citizens of Hong Kong,” as well as shot across the bow for Beijing that further measures could be taken.

“The United States has multiple options available, including termination of access to special technology, customs, tax and transportation agreements, which have long served bilateral trade and commercial interests,” according to a joint statement from Commission Chairman Robin Cleveland and Vice Chairman Carolyn Bartholomew. They added that the United States could sanction individuals.

China has called the United States’ furor over Hong Kong a “nothingburger” and said the White House was “bluffing” over imposing sanctions. Premier Li has since said that the United States and China “need each other” since the countries’ economies are intertwined.

Analysts have worried crushing sanctions could lead to a renewed trade war between the countries and potentially scuttle the Phase One trade deal reached earlier this year. In that deal, China agreed to purchase an additional $200 billion in products from the United States, though it is almost certainly not going to be able to meet that threshold.

The tariffs imposed on Chinese exports already hurt the U.S. economy, according to a research paper by New York Federal Reserve Bank economists posted Thursday. The 2018 trade war reduced U.S. investment growth by 0.3% by the end of 2019, and likely will reduce growth by another 1.6% off by the end of this year, the study found.

Another grim milestone has hampered this week’s rally: The number of deaths in the United States attributed to Covid-19 officially topped 100,000 mid-week. According to data compiled by Johns Hopkins University, 5.8 million have contracted Covid-19 worldwide and more than 360,000 have died. In the United States, 1.7 million have contracted the disease nationally and 101,000 have died.