U.S. President Donald Trump’s orders to eliminate the special treatment that was given to Hong Kong is most likely to put China-U.S. tensions back in the headlines again, acting as a major driver of volatility in the global financial market. Some of the investors had stated that Trump’s decision firmly brings back an issue that happened earlier this year when Beijing and Washington struck a Phase 1 deal amidst their months-long trade battle. The trade began in the spring of 2018 and has always been a constant source of uncertainty for the global equity markets since then.
The tensions between the largest economies of the world started re-emerging last month when the United States blamed China for spreading the coronavirus. This marked the beginning of a new round of escalation. According to investors, volatility will increase as the administration is looking forward to eliminating a range of policy agreements, including the extradition to export controls, and also threatens any new sanctions. This re-emergence of the U.S.-China tensions would add to the risks that are already hanging over the market. For now, the markets are predicted to stay focused on the trajectory of the pandemic and the significant signs of a U.S. recovery.
The U.S rally slowed down in the month of May as investors made an assessment of how the virus would behave and how the world economy would recover, as the countries started relaxing lockdown restrictions, and re-opening their economies. A serious rupture between Washington and Beijing now could possibly throw a wildcard in that assessment. Trump’s tough move against China also comes amidst his 2020 re-election campaign in which the opinion polls show that the U.S. voters are increasingly embittered towards Beijing, especially due to the COVID-19 outbreak.