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Thursday, April 5, 2018

USA-China conflict shakes stock market


The Dow Jones managed to close on Tuesday with a rise of 1.3%, recovering part of what was left on Monday in another day dominated by volatility. With the fall of this Wednesday, it already loses 5% in the year. It all comes down to a single cause: the recent conflict arisen from the tariffs battle between the United States of America and China.

The escalating tension between the United States and China is increasingly worrying Wall Street, fearing that the trade confrontation will lead to an open war that can have consequences on global economic growth and financial stability. The Dow Jones Industrial Average (DJI) lost 1.8% at the opening of the session and goes deeper into the correction zone, while the S & P 500 was 1.3% and the Nasdaq, 1.4%. The conflict between the two major powers is aggravated rapidly. The US presented last night the list with 1,300 products to which it will apply a tariff of 25% to appease the Chinese "disloyal" practices, which generate imports valued at 50,000 million dollars.

China responded within a few hours with a measure of a similar caliber, in a reaction that came earlier than expected. Wilbur Ross, US Secretary of Commerce, tried to play down the drama by saying that the impact of the Chinese tariff will have a smaller effect on the economy, accounting for only 0.3% of the gross domestic product. Furthermore, he also said that Donald Trump's relationship with the Chinese President, Xi Jinping, is very good and that will allow creating a dialogue to reach a negotiated solution to the litigation. This, however, has not calmed down some concerns about the real ramifications of the dispute.

The head of the American trade tried to portray an image of confidence: "Even wars end with the signing of a treaty," he said. Investors, however, do not see it the same way. They crumble the lists and make accounts trying to anticipate damages. That caused that the valuation of the manufacturers of General Motors cars and Ford Motor fell 3% when initiating the session, whereas Tesla lost 5%. The same setback suffered the aerospace Boeing, according to international media.

The shares of other industrial giants with interests in the Chinese market, such as machinery manufacturers Caterpillar and Deere, also suffered falls of 3% due to fears that this confrontation will lead to a further escalation of protectionist measures. Apple and Nike did it for a 2%. The change in the dollar, however, remained stable but the increase in uncertainty caused gold to rise by 1%. Analysts agree that the US economy is solid enough to support the tariff. Moreover, they see the latest events as the beginning of a negotiation process, which will lead to a solution at some point. But they also recognize that the market is too sensitive at this time and these types of inconveniences create volatility.