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Stocks Pressured on Stirring U.S.-China Tensions

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U.S. stocks were pressured Wednesday, as tensions between the U.S. and China percolate, putting a pause on the earnings-driven movements in stocks. 

The S&P 500, down 0.1% in premarket trading, swung to a 0.1% gain on the strength of the tech-heavy Nasdaq, which rose 0.15%. The 10-Year Treasury yield dipped to 0.58%, a risk-off signal. Yields fall when prices rise. 

The U.S. ordered China to close its consulate in Houston, citing interference with American intellectual property. China said if the U.S. does not reverse its decision, China will respond firmly. Intellectual property theft is a hot button issue between the two countries and the White House has frequently blocked Chinese companies from buying U.S. semiconductor products that contain sensitive software. More broadly, the spat is reflective of the fact that a trade deal between the two countries is unlikely and escalated aggression seems more likely. 

Large cap oil and bank stocks were down about 1%, while most consumer discretionary stocks were down a few tenths of a percentage point. Consumer staples, a relatively defensive sector, were up a bit. But the S&P 500’s losses were limited as big tech companies hung around a flat-to-higher move. 

Second quarter earnings, which have largely been coming in better-than-expected, have moved some areas of the market higher, while tech investors anxiously await earnings that could spoil a huge rally in tech stocks for the summer, a rally built on the assumption that the stay-at-home and work-from-home environment will create a sustained acceleration in secular growth trends, rather than a one-time acceleration. The valuation gap between value and growth has widened, even as value stocks have made up some ground in July.

Another huge key for the U.S. market in the medium-term is a vaccine for the virus. Pfizer  (PFE) - Get Free Report and BioNtech  (BNTX) - Get Free Report aid they have agreed to $1.95 billion deal with the U.S. department of Health and Human services that would allow them to jointly produce 100 million free doses of a vaccine by the end of 2020 and potentially 1 billion by end 2021. This aids recent investor confidence that a vaccine is indeed on the way. Pfizer and Biotech shares rose 5% and 8%, respectively. 

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