"Is the US/China Trade News a Reliable Predictor of Stock Market Movement?"

In the constantly evolving realm of global finance, the geopolitical theatre profoundly influences market movements. As the two largest economies, the US and China stand at the centre of this delicate dance, their policies serving as harbingers of market trends. Reflecting on the seminal work of Baker et al. 2021, it's clear that US-China trade policies play an instrumental role, accounting for as much as 40% of stock market movements.

The Interplay of US-China Trade Narratives on Leading Corporations

In this in-depth analysis, we harness the power of our "Narrative Observatory" service to decode the intricate relationships of the top-performing corporations from both the US and China, as dictated by their market capitalization. We shed light on:

China's Top companies:

• Tencent (TCEHY),

• Kweichow Moutai Co., Ltd. (600519.SS),

• Alibaba Group (BABA),

• Industrial and Commercial Bank of China (1398.HK),

• China Mobile Limited (0941.HK),

• Agricultural Bank of China (601288.SS),

• China Construction Bank Corporation (601939.SS),

• Bank of China Ltd. (601988.SS),

• Pinduoduo Inc. (PDD),

• PetroChina Company Limited (601857.SS).

US Market Leaders:

• Apple Inc. (AAPL),

• Microsoft Corporation (MSFT),

• Alphabet Inc. (GOOG),

• Amazon.com Inc. (AMZN),

• NVIDIA Corporation (NVDA),

• Tesla, Inc. (TSLA),

• Meta Platforms, Inc. (META),

• Berkshire Hathaway Inc. (BRK-B),

• Visa Inc. (V),

• JPMorgan Chase & Co. (JPM).

Our mission is to unravel the influence of pivotal US-China trade narratives, encompassing "global trade dynamics", "trade wars", "currency exchanges", "bilateral ties", "imports", and "exports" on these market giants.

Methodological Approach to Narratives and Financial Trends:

In our comprehensive approach, we first meticulously sourced a vast array of news narratives pertinent to US-China trade dynamics.

To ensure we captured the sentiment and tonality of these narratives accurately, we employed multiple renowned data dictionaries. This inclusion is critical, as narratives are multifaceted, and sentiment can vary based on the dictionary applied. Among the dictionaries we utilized are the "Harvard IV-4 Psychosocial Dictionary", the "WordNet-Affect dictionary", and the “Loughran and McDonald Sentiment Word Lists dictionary". Each of these dictionaries offers unique insights, allowing us to harness a more rounded view of sentiment.

Parallelly, we undertook an assiduous compilation of the historical stock market data of our focus companies.

With our datasets in place, we embraced advanced statistical methodologies. Using Pearson's correlation coefficient and Granger causality tests, we discerned patterns and relationships between the aforementioned trade narratives and stock market trends. This rigorous process allowed us to ascertain the subtle influences of geopolitical narratives on the stock valuations of these top-tier corporations.

In essence, our methodological approach is a confluence of narrative analysis and financial trend examination, designed to present a well-rounded and informed perspective on how geopolitical shifts can impact the economic landscape.

Findings

The economic interplay between the US and China is pivotal in shaping the global financial landscape. Through the following analysis, we aim to provide a clearer understanding of how trade narratives between these two giants influence their top market performers. Let's delve into the data and discern the patterns that emerge.

Market Resonance in China:

Diving into the empirical results, the foremost graph elucidates the interconnectedness between the tonality of the US/China trade policy news and the stock trajectories of the top 10 Chinese companies as measured by market capitalisation.

Immediately discernible are two crucial patterns:

• The undulating nature of the trade news' average tone, captured in blue, oscillates between moments of optimism and pessimism, reflecting the dynamic geopolitical landscape.

• Mirroring this, the stock trends of China's premier corporations, showcased in orange, vividly correlate. An upsurge in positive news sentiment generally heralds a bullish phase in stock valuations, while a dip in sentiment often forecasts a bearish trend.

This synchronisation is more than just coincidental; it epitomises how susceptible the market is to the global trade narratives, underscoring profound ramifications for the economic trajectory of Chinese entities.

The American Echo:

Transitioning to the US landscape, the subsequent graph weaves a similar yet distinct narrative. It juxtaposes the stock trends of the top 10 American corporate giants against the tone of the US/China trade news.

Drawing from the data, two primary insights emerge:

• The American corporations, charted in orange, display a pronounced upward tilt, emblematic of a robust US market. Such resilience could stem from internal economic strength or the nation's varied international engagements.

• Yet, the influence of trade sentiment, delineated in blue, is palpable. Moments of subdued sentiment either temper the market's bullish momentum or induce slight downturns.

These parallel trajectories not only reflect the financial health of American corporates but also underscore the layered impact of global politics on the US financial landscape.

The Sentiment Distribution of Trade Policy US/China News:

The "Sentiment Distribution of Trade Policy US/China News" offers an insightful dive into the tone and sentiment associated with trade news. The distribution manifests a bell-curve-like profile. The majority of the news sentiment converges towards the neutral spectrum, centering around values proximate to zero. Interestingly, the pronounced peak near zero signifies that a substantial chunk of the news is neutral or mildly positive. On the left flank of the graph, we observe fewer entries, indicating that only a minority of the news ventures into negative sentiment territory.

Predictive Power of News:

An intriguing component of the presented data is the predictive capacity of US/China trade policy news on market performance. Through the lens of two distinct graphs, we can gauge the impact of trade news on the top 10 companies by market capitalization, both in China and the US. These visualizations elucidate the timeline over which news sentiment exerts its influence on stock values, offering us a nuanced understanding of how responsive and resilient markets are to geopolitical developments.

Predictive Power of News on Top 10 CHINA Companies by Market Cap:

The graph dedicated to China reveals that the influence of trade news on the leading Chinese companies is prominent. Over the course of 20 days, the effect of the news remains stable, with a slightly heightened impact noted in the early 5-day window. This suggests that the Chinese market responds promptly to US/China trade news nuances, and the imprint of such news endures, retaining its relevance over an extended timeframe.

Predictive Power of News on Top 10 US Companies by Market Cap:

On the other hand, the graph representing the US illustrates how trade policy news affects the performance of top American corporates. Spanning 20 days, the influence of the news gradually tapers. Nonetheless, the impact persists and remains significant even on the 20th day. This emphasizes the long-standing resonance of trade narratives in the US corporate realm.

Concluding Reflections:

The analysis underscores the profound influence of US/China trade policy narratives on market behavior, both in immediate sentiment shifts and in longer-term stock performance of leading companies. The evident correlation is not merely academic; it offers a tangible roadmap for businesses. By staying attuned to such geopolitical narratives and the sentiment they engender, companies can harness this intelligence to anticipate market shifts, adjust strategies, and ensure they're well-positioned in an ever-evolving global landscape. In essence, these findings illuminate a potent tool for businesses: the ability to forecast and respond to market dynamics through the lens of geopolitical discourse.