Stock market rally at risk from rising US-China tension

Stocks continued to rally last week, with the S&P 500 rising 3 percent to finish the month of May with a 4.5 percent gain.

However, while the re-opening of economies from COVID-19 lockdowns has been boosting markets, a new risk is rising: US-China geopolitical tension.

After repeatedly accusing China of being responsible for the spread of COVID-19, US President Donald Trump raised the ante on Friday by ordering an end to Washington’s special treatment of Hong Kong in response to China's passing of a national security law on the city.

From Reuters:

Some investors said Trump’s move firmly brings back to the fore an issue that had receded earlier this year when Washington and Beijing struck a Phase 1 deal in their months-long battle over trade terms...

“What Hong Kong represents is longer than a one-day or one-year issue,” said Jim Paulsen, chief investment strategist at the Leuthold Group. Paulsen said he believes that geopolitical tensions are likely to hang over markets over the longer term...

[Erin Browne, a portfolio manager at Pimco,] said the tensions may weigh on the Phase 1 trade deal. “While a repeal of the Phase 1 trade deal between the U.S.-China would hurt market sentiment into an important election year for President Trump, the risks of that happening are escalating,” she said.