The S&P 500 The S&P 500 is up 40 percent from its low on March 23, marking its best 50-day rally ever. | Source: Johannes EISELE / AFP)
- The U.S. government will impose new restrictions on state-owned Chinese media outlets and plans to halt Chinese airlines’ access.
- The stock market remains unfazed by it, slightly retracing by 0.16% following a 2.05% gain on June 2.
- Equities are seemingly pricing in degrading U.S.-China relations.
The U.S. government will impose new restrictions on Chinese media outlets and suspend inbound Chinese airlines’ access, as tensions between the U.S. and China intensify. Curiously, the U.S. stock market is completely unfazed by it.
The Dow continues its break beyond the 26,000 level. | Source: Yahoo Finance
Stock Market Ignores US-China Tensions
The lackluster reaction of investors to growing geopolitical risks indicates two things.
First, it shows the stock market is already pricing in a degrading relationship between the U.S. and China.
The Trump administration has applied pressure on Beijing since early May. He specifically criticized the Chinese government’s handling of the pandemic and implemented new sanctions.
Now, the U.S. government is going after Chinese media outlets.
Investors seemingly expected a crackdown on Chinese state-run news agencies after China ousted American journalists with visa restrictions.
Due to the visa restrictions imposed by China on May 9, the U.S. government’s actions are likely considered as countermeasures.
The U.S. did not unilaterally mistreat Chinese media outlets. Rather, it responded to China’s measures in a similar manner.
China’s biggest broadcaster will see restrictions in the U.S. | Source: Reuters/Smita Prakash
The decision of the U.S. to halt the access of Chinese airlines was also retaliatory.
On May 23, the U.S. accused China of rejecting American airlines and making it difficult for passenger planes to fly to China.
The U.S. Transportation Department reportedly said at the time that it is attempting to convince China to allow U.S. airlines to resume their services.
The U.S. and China failed to see a resolution, eventually leading to the threat of a ban on Chinese airlines.
The order comes into effect on Thursday, with Trump’s White House suspending passenger flights to the U.S. by Chinese airlines. | Source: Shutterstock.com/B.Forenius
Second, the clampdown on Chinese news networks and airlines by the U.S. does not directly affect the stock market.
Tariffs and direct sanctions on Chinese companies may hinder supply chains used by American companies. Major disruptions in the transportation of raw materials can heavily slow down key sectors such as manufacturing and semiconductor.
When U.S.-China relations are at a historical low point and the stock market prices it in, minor events are unlikely to affect equities.
More to that, House of Representatives Foreign Affairs Committee’s top Republican Michael McCaul reportedly described the restricted media networks as “propaganda outlets.”
The U.S. does not consider them to be legitimate news agencies, and the stock market seems to agree.
These are Chinese Communist Party propaganda outlets that peddle dangerous information to grow the Party’s power — not report the news.
Has the Worst Already Passed?
The U.S. stock market is en route to complete a v-shape recovery.
While retail investors are counting on the economy to reopen and major industries to expand their workforce, many billionaires do not trust the ongoing rally.
The Federal Reserve’s gloomy data points suggest otherwise. Fed chair Jerome Powell warned unemployment can reach 25%.
Investors seem to believe China will have to ultimately crumble and seek out for a deal.
Yet, BlackRock China will soon return to “near-trend growth” in the short-term as it aggressively kickstarts its economy.
The momentum of the U.S. stock market is so strong that it is forgetting that geopolitical risks can become a real threat to American equities in the coming months.
Some believe President Donald Trump and President Xi Jinping will work out a resolution to focus on economic recovery.
If that does not happen, the stock market’s most hated rally in history may crumble.
This article was edited by Samburaj Das.
Last modified: June 4, 2020 7:04 PM UTC