Stocks rebound after Trump pulls his punches on China

Wall Street turned higher late in Friday’s session after Donald Trump’s latest salvo aimed at China did not deliver the harsh sanctions traders had feared.

The S&P 500 closed up 0.5 per cent and the Dow Jones Industrial Average ended little changed, recovering from a fall of more than 1 per cent, after the US president said in a scheduled address that his administration would revoke special trade privileges for Hong Kong.

Analysts had been predicting a much more aggressive US response to Beijing’s approval of a national security law for Hong Kong. A range of measures, including scrapping the countries’ Phase One trade deal, new import tariffs and freezing assets of Chinese citizens had all been mooted, which helped unravel some of the recent investor optimism over the loosening of coronavirus lockdowns.

In Europe, markets had closed sharply lower as risk aversion led investors to take profits from cyclical sectors such as travel and leisure, which have led the market’s rebound over the past two weeks. London’s FTSE 100 was down 2.3 per cent, while in Frankfurt the Xetra Dax dropped 1.6 per cent.

“The risk of an economic, earnings, trade, or political hiccup to normalisation means near-term returns are skewed to the downside, or neutral at best,” Goldman Sachs analysts including David Kostin told clients. The S&P 500 had already hit Goldman’s year-end 2020 target of 3,000 points and the earnings growth now priced into stocks for 2021 “represents a best-case scenario — achievable, but definitely optimistic,” said the broker.

Sino-US tensions had been brought to the fore after Beijing pushed ahead with legislation that has raised concerns about Hong Kong’s future as a financial centre.

“Geopolitical risks from US-China relations do not appear to be fully priced in, although we believe China’s V-shaped recovery will remain on track,” said Joyce Chang, chair of global research at JPMorgan.

“The global economy is opening up and is set to generate one of the strongest growth out-turns on record, with GDP up close to 20 per cent annualised in the second half of the year, but we see the balance of risks as only moderately bullish. Markets have rebounded aggressively across most asset classes . . . and are pricing in an expansion that is already under way instead of one that is just beginning.”

The onshore exchange rate for the renminbi, which investors have been watching as US-China friction intensifies, was little changed at Rmb7.14 per dollar. That was after the People’s Bank of China set the currency’s trading band stronger than analysts had expected.

“Recent [renminbi] fixings by the PBoC suggest an effort to dampen volatility — not drive the currency lower,” said Larry Brainard, chief emerging markets economist at TS Lombard. He added that the currency was set for “periodic bursts of volatility . . . but not of continuing steady depreciation”.

Oil prices climbed. US benchmark West Texas Intermediate oil futures touched their best levels since early March, with the July contract rising more than 5 per cent to $35.49 a barrel.

Additional reporting by Yuan Yang in Beijing

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