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U.S.-China Tension Heats Up Again: ETF Areas in Focus

·4 min read

Just as coronavirus-induced market volatility started to pass thanks to the reopening of global economy, investor concerns about rising tensions between the United States and China undermined the optimism. U.S. stock futures are negative at the time of writing.

President Donald Trump recently said that he is mulling over taking action against China this week over its effort to enact national security laws on Hong Kong. On Thursday, China approved a draft decision for new national security legislation in a move that would impose on the autonomy of the Hong Kong region and endanger its special trade status with the United States.

Apart from the Hong Kong issue, the U.S.-China relation worsened on President Trump’s repeated verbal attacks against China for its mishandling of the coronavirus contagion as well as Beijing’s treatment of minority Uighur Muslims in the Xinjiang region. The U.S. Senate passed a bill by unanimous consent recently to delist some Chinese corporations from U.S. exchanges.

Investors should note that the U.S.-China phase-one trade deal was signed in January after almost two years of wrangling. The apparent re-escalation of tensions has flared up concerns that the no further progress on the trade deal would be seen in the near term. However, no more penal tariffs are likely given the economic woes caused by coronavirus all over the world.

Still, we highlight the ETF areas that could be in focus amid tensed U.S.-China relations.

Agriculture Under Pressure?

Despite the mini trade deal, American pork still faces an additional 25% tariff in China compared to its global competitors. Notably, China purchases about half of the U.S. soybean and is the second-largest buyer of American cotton. Exports of farm goods, factory products and crude oil are all running short of what was promised in the trade deal. This may put agricultural ETFs like Invesco DB Agriculture ETF (DBA) in a tough spot.

U.S. Markets to Skid?

Futures of U.S. key indexes are showing that Wall Street is positioned for a red patch. Investors should note that heightened trade disputes caused occasional upheavals in these key indexes in 2018 and 2019. If trade tensions flare up along with economic recessions, SPDR S&P 500 ETF SPY, SPDR Dow Jones Industrial Average ETF DIA and Invesco QQQ Trust QQQ may be under pressure.

Will Semiconductor Be at Risk?

Per Morgan Stanley equity strategists, “semiconductor and semiconductor equipment companies have the highest revenue exposure to China at 52%” and are exposed to maximum risks on rising trade tensions. The rising tensions may hurt ETFs like VanEck Vectors Semiconductor ETF SMH.

Yuan Devaluation in the Cards?

Per a multi-asset investment manager, “currency is the most effective lever to offset the impact of tariffs,” as quoted on CNBC. If the yuan drops about 8%, U.S. companies would have to experience only a 2% jump in importing Chinese goods. This is because a lower yuan would reduce the cost of imports to U.S. companies and any add-on tariffs on the price tags would keep the after-duty price almost at the level where it is now.

The Chinese yuan could weaken to as low as 7.40 against the dollar amid latest disputes, according to Bannockburn Global Forex’s Marc Chandler. WisdomTree Chinese Yuan Strategy ETF CYB may skid if there is a devaluation.

Will China Target the U.S. Treasury Market?

China is the second-largest holder of U.S. treasuries. The country sold treasuries for the first time in three months in May. The country’s holdings fell to $1.081 trillion, from $1.092 trillion in February. Things may worsen in the U.S. treasury market if tensions rise.

If the trend continues, U.S. treasury yields may rise, resulting in a drop in bond prices. iShares 20+ Year Treasury Bond ETF TLT will come under pressure in such a situation. Higher treasury yields would make new debt issuances for the U.S. government costlier. However, chances of a prolonged damage in U.S. treasuries are less likely as it is hard to find any alternative safer than the dollar right now.

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Click to get this free report iShares 20 Year Treasury Bond ETF (TLT): ETF Research Reports SPDR SP 500 ETF (SPY): ETF Research Reports Invesco QQQ (QQQ): ETF Research Reports SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports VanEck Vectors Semiconductor ETF (SMH): ETF Research Reports Invesco DB Agriculture ETF (DBA): ETF Research Reports WisdomTree Chinese Yuan Strategy ETF (CYB): ETF Research Reports To read this article on Zacks.com click here. Zacks Investment Research Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report