‘Threat to the rally’: Investors await US decision on Hong Kong

Asian stock markets fell and major currencies were held in check on Friday, as investors await the United States’s response to China’s move to tighten control over the semi-autonomous territory of Hong Kong.

China’s parliament on Thursday pressed ahead with national security legislation for the city, raising fears over the future of its democratic freedoms and its ability to function as a financial hub for the Asia-Pacific region.

US President Donald Trump, who has promised a tough response, said he will hold a news conference on China later on Friday. Concerns about a further deterioration in China-US relations sent stocks lower and put investors on edge.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.3 percent. The Nikkei retreated from a three-month high and, though moves were slight, riskier currencies were under pressure against the US dollar.

Futures for the US S&P 500 benchmark stock index slipped 0.7 percent.

“It is seen as a major threat to the rally we’ve had and the recovery,” said Shane Oliver, chief economist at Australian wealth manager AMP Capital.

The possible US response could range from a tearing up of the Phase One trade deal and fresh tariffs on China, to milder travel or financial sanctions on Chinese officials, he said.

“If it’s at the relatively mild end, then I don’t think it would derail the recovery bull market, but if it’s at the more extreme end with tariffs and harsh treatment of Hong Kong, then I think it gets more problematic,” Oliver said.

Trump offered a muted response to Hong Kong’s mass democracy protests last year while prioritising a trade deal with Chinese President Xi Jinping. But ties with Beijing have since soured considerably through the COVID-19 pandemic.

Hong Kong’s government warned on Friday that withdrawing its special US status, which has underpinned it as a finance hub, could be a “double-edged sword” and urged the United States to stop interfering in internal affairs.

The Chinese yuan, a barometer of Sino-US tension, weakened slightly to 7.1490 per dollar in onshore trade.

Hong Kong’s Hang Seng index was 0.4 percent lower in early trade and has lost 3 percent in the two weeks since news of China’s security legislation broke.

“US-China tensions will continue to rule market sentiment as the new trading month kicks off [next week],” Prakash Sakpal, Asia economist at Dutch investment bank ING, said in a research note sent to Al Jazeera.

May marches on

Still, despite the uncertainty and the near-daily release of grim economic data, enormous global stimulus seems to have dispelled the old adage among financial market traders to “sell in May”.

The S&P 500 is up 4 percent for the month and is on track for its best May since 2009. The rally in the risk-sensitive Australian dollar is slowing, but the currency has gained nearly 2 percent for the month and sits 20 percent above March lows.

The reason for optimism stems from signs of progress away from the currently parlous state of the world economy.

The number of Americans seeking jobless benefits fell for an eighth straight week last week and New York has outlined plans for reopening.

“As we have said about the reopening and ensuing recovery, this is a process,” said RBC Capital Markets’ chief US economist, Tom Porcelli. “And right now the process is moving along in the right direction.”

Elsewhere the euro remained firm and headed for its best month since December as the European Union’s announcement of a 750-billion-euro ($833bn) coronavirus recovery fund fuels optimism about the euro-zone economy and its political future.

The euro was last at $1.0855, close to a two-month high of $1.1094 hit overnight.

Gold was firm at $1,720.75 an ounce.

Demand jitters kept oil prices under pressure. Brent crude slipped 29 cents, or 0.8 percent, to $35.00 a barrel, while US crude was down 1.2 percent at $33.31 a barrel.

The bond market remains priced for maximum caution. Yields on benchmark 10-year US Treasuries fell three basis points to 0.6705 percent on Friday. That is more than 100 basis points below where they began 2020. Yields fall when prices rise.