China stock market

US equities hold up better than Chinese shares in trade war tension, but this is not a zero-sum game say analysts

While broad measures of American equities have held up better than their Chinese counterparts, striation in the US market shows investors anticipate some steep losses

PUBLISHED : Thursday, 21 June, 2018, 12:33am
UPDATED : Thursday, 21 June, 2018, 2:36am

Trade wars are good and easy to win – even if the victory is won at a great cost. That is the early view from financial markets as the tariff dust-up between China and the US shows increasing signs of affecting stock prices.

Broad measures of American equities have held up better than their Chinese counterparts, but striation within the US markets suggests that investors anticipate steep losses in some stalwart names.

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“If we compare the price action between Chinese equities and US equities (particularly the Russell 2000), it’s pretty clear that the market is discounting the US as a relative winner in the outcome,” Jeffrey deGraaf, Renaissance Macro Research’s co-founder, wrote.

“That’s not to say trade wars are bullish, but the S&P 500 has absorbed the threat and even body blows substantially better than China.”

Analysts estimate that the full impact of all measures threatened by Trump could shave as much as half a percentage point off China’s economic growth.

Broadening the list of inbound products from China subject to higher taxes would also ultimately raise prices for US consumer goods.

“The bottom line is that trade wars are akin to zero-sum games or mutually assured destruction,” cautioned Sean Darby, chief global equity strategist at Jefferies. “In the long run, no one really wins.”

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The rhetoric weighed on Chinese stocks on Tuesday, with the Shanghai Composite Index plunging to a two-year low and the yuan coming under pressure.

American equities showed more resilience. While S&P 500 Index futures slid 1.5 per cent overnight, the cash measure closed lower by just one-third of that.

DeGraaf drew attention to the weakness in Chinese technology shares, which hit fresh lows relative to their American counterparts in another signal that investors anticipate any additional trade clashes between the world’s two largest economies will mean more pain for China.

A look at the Dow Jones Industrial Average, however, serves as a reminder that a relative win is not an absolute one.

The index, based on 30 stocks traded on the New York Stock Exchange, is mired in its longest losing streak in 15 months, with Boeing and Caterpillar – two multinationals that get at least 10 per cent of sales from China – accounting for the bulk of the losses.

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Escalating political rhetoric on trade “will continue to be market negative at least for the next few days as the two countries continue to bare teeth, both for the benefit of domestic audiences and to convince each other of their seriousness and resolve,” writes Terry Haines, analyst at Evercore ISI.

Within the US equity market, investors have targeted smaller companies with a domestic focus. The Russell 2000 Index even eked out a gain Tuesday.