Weak June Opening as China Tensions Cloud Global Markets

Statue of Liberty art is seen Monday through a smashed Dolce and Gabbana store window in New York’s SoHo neighborhood. Protesters broke into the store Sunday night in reaction to the May 25 police killing of George Floyd in Minneapolis. (AP Photo/Mark Lennihan)

MANHATTAN (CN) — Hoping to repeat May’s overall positive gains, Wall Street entered June with minor gains.

The Dow Jones Industrial Average gained less than 100 points by the closing bell on Monday, with the S&P 500 and Nasdaq also increasing about half a percentage point each. 

Investors were likely encouraged by slightly improving manufacturing data. According to the Institute for Supply Management, manufacturing continued to contract last month but at a slower clip than in April. In May, the ISM’s purchasing managers’ index registered 43.1%, up from 41.5% in April.

“The coronavirus pandemic impacted all manufacturing sectors for the third straight month,” Timothy Fiore, chair of the ISM’s survey committee, said in a statement. “May continues to be a transition month, as many panelists and their suppliers returned to work late in the month.”

The PMI data was followed later in the day by a report from the Congressional Budget Office, which now predicts gross domestic product will fall by nearly $8 trillion over the next 11 years due to the Covid-19 pandemic.

Investors expect the economy to remain rocky through June and are playing their hands accordingly. The one wild card, however, is another trade war with China. 

Tensions between the United States and China are high after China’s congress last week 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.

Last week, President Trump announced plans to eliminate policy exemptions for Hong Kong, including extradition treaties, export controls and the use of duel-use technologies. Much to investors’ relief, however, President Trump did not mention pulling out of the trade deal with China.

But analysts worry that both sides now view the trade deal as an albatross.

“I think Phase 1 was always on weak legs,” said Scott Kennedy, a senior adviser at the Center for Strategic & International Studies, in a Monday webcast. “But I don’t think that the Chinese want to simply openly walk from the deal. … They probably want to put the onus on the United States.”

Kennedy said China may be trying to goad Trump into blowing up the deal. “If Trump walks fully from the deal, that in some ways keeps up his ‘tough guy’ bona fides,” he said.

If that happens, Kennedy said it could present a third “gut punch” to many Americans. “It definitely means that it’s going to be harder for American farmers and others in the Midwest who were counting on the growth of these exports to help them in the middle of the deepest recession the U.S. has faced in a very long time and now we’re seeing domestic civil unrest as well,” he said.

Administration officials over the weekend continued to keep the heat on China. “We’re going to look at whether we ought to go and sanction individuals who destroyed this freedom inside Hong Kong,” Secretary of State Mike Pompeo said on Fox.

GOP representatives also have floated legislation that would restrict investment in companies tied to the Chinese armed forces.

China has counterpunched meanwhile, reportedly telling state-run companies to stop buying soybeans and pork from the United States. The move would further damper the already fizzling trade deal, in which China had agreed to purchase an additional $200 billion in agricultural and other products from the United States.

In a commentary posted Monday on the state-run Xinhua.net, China said President Trump had reneged on his agreement in March to “take good care” of Chinese nationals in the United States by proposing to expel Chinese students with ties to the country’s military from universities.

“More seriously, such a racist move exposes deep-seated zero-sum game mindset and Cold-War mentality of some U.S. politicians,” the commentary states. “It resembles the anti-Communism narratives in the times of McCarthyism in the late 1940s and 1950s in the United States.”

China also has taken aim at the United States for the recent anti-racism protests, with Foreign Ministry spokesperson Hua Chunying tweeting, “I can’t breathe,” in response to State Department criticisms over Hong Kong. 

The number of people infected worldwide with Covid-19 has eclipsed 6.2 million, while 374,000 have died. according to data compiled by Johns Hopkins University. In the United States, about 1.8 million are confirmed to have had Covid-19, while 104,000 have died.

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