By Ansh Chaudhary
Investor belief in an imminent resolution to the U.S.-China trade talks had helped equities perform well during most of this year. That changed earlier this week when Donald Trump threatened to increase tariffs on $200 billion of Chinese goods to 25% and impose a 25% import rate on the rest of the $325 billion of untaxed Chinese goods, reports Market Watch.
Reuters reports that President Trump threatened to increase tariffs in response to a diplomatic cable from Beijing received last Friday night. Government sources claimed that a draft trade agreement was sent back to Washington with edits that undo months of negotiating. Says Reuters, "In each of the seven chapters of the draft trade deal, China had deleted its commitments to change laws to resolve core complaints that caused the United States to launch a trade war: Theft of U.S. intellectual property and trade secrets; forced technology transfers; competition policy; access to financial services; and currency manipulation." Chinese officials claim that changing the laws the U.S. demands is not easy and requires a unique process that takes time.
The trade tensions are escalating at a time when China is attempting to stabilize its growth, as the global economy is considered to be in a late-stage economic cycle. Chinese exports have dropped 2.7% from this time last year, and trade surplus has decreased to $13.8 billion in April, down from a $32.7 billion trade surplus in March, according to The Wall Street Journal. Trade tensions with China's biggest partner, the U.S., could further complicate things.
While investors have been exiting equity markets for safe havens such as bonds, many on Wall Street believe that this is a good opportunity to "buy the dip." JPMorgan (NYSE:JPM) CEO James Dimon explains that economic fundamentals in both China and the U.S. remain strong. It would be in both parties' best interests to reach a trade agreement, because not reaching one could change global growth dramatically. As negotiations continue this week, investors are hoping the two countries reach a deal.
Sectors: The average momentum score for the Sector Benchmark ETFs decreased from 23.18 to 14.09. Momentum increased for only one of the 11 sectors last week. Health Care's score, which increased 4 points, bumped that sector up one place from last. Technology remained the top sector. Financials jumped from fourth place to second, despite its 8-point decrease in momentum score.
Factors: Among the Factor Benchmark ETFs, the average factor score decreased from 24.92 to 16.00. Momentum decreased for all 12 factors last week. The score for High Beta decreased the most, dropping 15 points. This caused High Beta to fall from first place to third. Market Cap overtook High Beta and Quality to grab the top spot, while Quality remained in second. Yield fell to last place after a 10-point decrease.
Global: The average Global Benchmark ETF momentum score decreased from 17.64 to 6.73 for the week. Momentum in the global sector decreased in all 11 sectors. China's momentum score decreased the most, losing 18 points, pushing it from fourth place to eighth. Latin America remained the laggard with a 15-point decrease in momentum score. The USA remained in the top spot despite a 9-point decrease in momentum score.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.