Breakdown In China Negotiations Sends U.S. Risk Markets Reeling

This insightful monthly market commentary will help you look beyond the headlines to better understand what is driving the current market trends that could impact your credit union’s investment portfolio.


For much of 2019, it appeared that U.S. and Chinese officials were close to reaching a comprehensive trade agreement, and global risk markets were effectively priced as such. However, things took a turn for the worse in May, sparking a risk-off trade and sending intermediate and long-term Treasury yields more than 35 basis points lower on the month. The shift in investor sentiment was initiated by a tweet from President Trump on May 5. Trump expressed frustration that the talks with China were moving “too slowly as they [China] attempt to renegotiate.” As a result, he said the United States would be increasing the tariff rate to 25% on more than $500 billion of Chinese imports by the end of the week if China did not meet U.S. demands. This caught investors by surprise and sent risk markets reeling when markets opened that Monday, including a 5% decline in Chinese stocks.

May At-A-Glance

  • Market sentiment turned notably bearish in May following a breakdown in U.S./China negotiations.
  • The Trump administration also decided to “weaponize” trade versus Mexico to affect immigration policy.
  • The markets had largely been focused on the inflation trend as it relates to a potential shift in Fed policy, but all eyes are on trade for now.

In the days that followed, there was much analysis as to what caused the sudden shift. With recent U.S. economic data better than expected (Q1 GDP and April jobs report were strong) and stock market performance solid, Trump may have seen an opportunity to push back on criticism that the White House may be relenting on its original demands and accepting a less robust agreement with China. However, Reuters reported that Chinese officials had “backtracked” on essentially all major U.S. demands, including intellectual property theft, forced technology transfer, competition policies, and currency manipulation.

The next day the Wall Street Journal presented a theory on why Chinese officials “backtracked” on their commitments. According to sources “familiar with the thinking of the Chinese side,” Beijing interpreted recent statements and actions by President Trump as a sign the U.S. was ready to make concessions. More specifically, Chinese leaders viewed Trump’s badgering of Fed Chair Powell to cut interest rates and expand the Fed balance sheet as evidence that the president thought the U.S. economy was more fragile than he claimed. “Why would you be constantly asking the Fed to lower rates if your economy is not turning weak?” said Mei Xinyu, analyst at a think tank affiliated with China’s Commerce Ministry. Of course, the Chinese have pushed back on this reasoning, with local media reporting that negotiations collapsed because U.S. officials attempted to add new demands in the final hours of negotiations.

This market overview is provided by ALM First Financial Advisors, LLC, the investment advisor for Trust for Credit Unions. Read more from ALM First about the latest economic data releases and overall market trends at

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June 7, 2019

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