Weekly Edge: What's At Stake For China As The Trade War Continues?

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by: Invest With An Edge
Summary

The average momentum score for the Sector Benchmark ETFs decreased from 14.09 to 2.55.

Among the Factor Benchmark ETFs, the average factor score decreased from 16.00 to 2.33.

The average Global Benchmark ETF momentum score decreased from 6.73 to -7.82 for the week.

By Ansh Chaudhary

Since last Friday, President Trump's tweet threatening to raise tariffs from 10% to 25% on $200 billion of goods imported from China has been hanging over Wall Street. These tariff hikes are a response to what President Trump sees as China's reversal on a number of prior commitments regarding fairer trading rules. Major indexes have fallen by 1-2% since last week. The yuan has lost a little over 2% against the dollar, according to Reuters. The stakes for both economies are high, but maybe more so for China.

In the following figure from MarketWatch, we can see exactly how lopsided the trade relationship is between the two countries. The impact falls mainly on Chinese producers and American consumers and farmers, reports MarketWatch. With the exception of agriculture, the U.S. is generally a net importer from China.

Along with the trade imbalance, the U.S. has had an ongoing battle with Chinese tech firms such as Huawei and ZTE regarding privacy concerns. In addition to the mounting pressure from the U.S., the Chinese government could face a nationalistic backlash if it is seen as "conceding too much to Washington," reports Reuters. "Agreeing to U.S. demands to end subsidies and tax breaks for state-owned firms and strategic sectors would also overturn China's state-led economic model and weaken the Communist Party's grip on the economy."

At the same time, China is also aware it must reach a deal soon to avoid a drawn-out trade war that could hamper its economic growth. Circumventing that route and retaliating U.S. companies directly could cause companies to shift investment outside the country, also a detriment to China's economy, says Reuters.

China hopes domestic spending from its citizens will "minimize the economic damage of its trade fight with the U.S.," according to The Wall Street Journal. However, figures for China's economy released in recent weeks have looked bleak. While industrial output and retail sales growth have been slowing, personal debt has been rising, due, in part, to China's pricey apartments. Consumer prices have also risen 2.5%, which has affected middle-class families in China, who earn only a fifth of what U.S. middle-class families earn, reports the Journal. Amy Shang, a research associate, mentions Chinese buyers are taking caution as living costs rise and limited job mobility is weighing on income.

Both sides have a lot at risk here, and they know that the longer the trade war goes on, the more it affects their domestic economies. Presidents Trump and Xi meet next at the G-20 summit in June.

Sectors: The average momentum score for the Sector Benchmark ETFs decreased from 14.09 to 2.55. Momentum increased for only one of the 11 sectors last week. Utility's score increased by 1 point, boosting that sector from eighth to third place. Consumer Staples and Real Estate overtook Technology and Financials for the top two spots, respectively. Energy remained the laggard, in part due to tensions rising in Iran this week.

Factors: Among the Factor Benchmark ETFs, the average factor score decreased from 16.00 to 2.33. Momentum decreased for all 12 factors last week. The score for High Beta, which fell 25 points, decreased the most. High Beta subsequently plummeted from third place to last. Low Volatility and Momentum overtook Market Cap and Quality for the top two positions, respectively.

Global: The average Global Benchmark ETF momentum score decreased from 6.73 to -7.82 for the week. Momentum decreased in all 11 global sectors. China's momentum score decreased the most, losing 26 points, dropping that sector from eighth to 10th place. Latin America remained the laggard after a 14-point decrease in momentum score. The USA remained in the top spot despite a 15-point decrease in momentum score.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.