Stocks Edge Lower as China Weighs on Outlook

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05/22/2020 | 10:57 am

By Anna Hirtenstein, Chong Koh Ping and Gunjan Banerji

U.S. stocks wavered, following a steep drop in Hong Kong shares, as tensions between Washington and Beijing swelled and the outlook for China's economy deteriorated.

The Dow Jones Industrial Average edged down about 65 points, or 0.3%, in morning trading. The S&P 500 fell 0.1%. The Nasdaq Composite was little changed.

Shares of energy companies were among the worst performers Friday as oil prices fell, dragging down the broader market.

All three major indexes are still on track for weekly gains of at least 2.5%., in part driven by optimism that coronavirus vaccines will be available later this year. Additionally, all 50 states have relaxed some of their coronavirus restrictions, boosting hopes about an economic recovery as municipalities start to reopen.

Some of the confidence that drove major indexes higher earlier in the week abated Thursday as investors parsed new data showing that about 2.4 million Americans filed for unemployment benefits in the week ending May 16, continuing a sharp deterioration in the labor market. On Friday, some of the simmering tensions between the U.S. and China escalated, continuing to weigh on the broader market.

The Hang Seng Index closed down 5.6% in its worst day since July 2015 after China moved to impose new national-security laws on the city.

China scrapped its economic growth target for 2020 in a stark acknowledgment of the challenges facing the world's second-largest economy, sending crude oil and metal prices sharply lower.

"Anything that knocks China's growth rate, whether it's a slower recovery from the coronavirus or a rise in tensions with the U.S., will weigh on global growth expectations," said Seema Shah, chief strategist at Principal Global Investors.

Friday's market moves may also be outsized due to lower liquidity, as many traders in Europe took the day off to extend a long weekend, she said.

Markets are closed Monday for Memorial Day in the U.S.

Beijing's decision to omit a formal target comes amid the sharpest contraction in four decades precipitated by a sudden halt in manufacturing activity because of the coronavirus pandemic. The nation's policy makers are signaling that they won't rush to introduce additional stimulus measures, which suggests more economic pain for countries that have become increasingly reliant on China as an engine of growth.

China's proposed national security law would challenge the financial hub's autonomy and threatens to increase tensions with the U.S. Congress condemned the move, with senators promising an urgent push on legislation that would impose sanctions on Chinese officials and institutions involved in undermining Hong Kong's Western-style rule of law.

This week's developments add to what had already been escalating tensions between the U.S. and China amid the coronavirus pandemic.

"The market had gotten kind of used to dealing with the coronavirus and terrible economic indicators, but potential disruption from a trade war is proving to be too much for sentiment," said David Madden, a market analyst at brokerage CMC Markets.

The dollar strengthened, with the ICE US Dollar Index recently rising 0.4%. Investors also turned to traditionally safer assets. The yield on the 10-year U.S. Treasury note fell to 0.661%, from 0.677% Thursday as bond prices rose. Gold prices gained 0.7%.

Brent crude, the global oil benchmark, fell 5% to $34.24 a barrel. Copper, a closely watched metal for its use in industrial activity, slipped more than 2.1%.

"China is today the biggest importer of crude oil, so Chinese growth is hugely important for oil demand," said Bjarne Schieldrop, chief commodities analyst at Nordic bank SEB. "But at the same time, demand is ticking up and supply is ticking down," as Asian countries reopen, he said.

In Asia, most major stock benchmarks ended the day lower. China's Shanghai Composite Index fell 1.9% while South Korea's Kospi Index retreated 1.4%.

Write to Anna Hirtenstein at anna.hirtenstein@wsj.com, Chong Koh Ping at chong.kohping@wsj.com and Gunjan Banerji at Gunjan.Banerji@wsj.com

 

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