Tension trade: Asian stocks dip on US-China row over Hong Kong

Asian shares slipped on Wednesday as investor concerns about rising tensions between the United States and China tempered optimism about a reopening of the world economy following crippling lockdowns to curb the spread of the coronavirus.

US President Donald Trump said late on Tuesday he is preparing to take action against China this week over its effort to impose national security laws on Hong Kong, but gave no further details.

Hong Kong shares led declines among major regional indexes, with the Hang Seng Index falling 0.92 percent, though it kept some distance from a two-month low touched on Monday, while mainland Chinese shares were down by 0.25 percent.

Riot police surrounded Hong Kong’s legislature on Wednesday morning as protesters threatened to take to the streets before the second reading of the controversial national anthem bill.

The bill would make it a criminal offence to “disrespect” the national anthem of the People’s Republic of China. It would also require that the anthem be taught in schools and sung by organisations.

The semi-autonomous Chinese territory is also on edge over China’s plans on Thursday to introduce legislation against acts deemed treasonous, secessionist or seditious. Critics say the new laws would severely damage Hong Kong’s status as a gateway for foreign investments into China.

“Seizing the chance, while the world is distracted, Beijing has started a process that may take several months but the implications are immediate and significant for a divided city where at least half of all residents fear Hong Kong will end up just another silenced Chinese city,” Diana Choyleva, chief economist at Enodo Economics, said in a note distributed via the Smartkarma platform and seen by Al Jazeera.

MSCI’s ex-Japan Asia-Pacific index recovered from a 0.12 percent dip to be 0.2 percent higher in late Asian trading and Japan’s Nikkei 225 index was almost flat.

The retreat from risk led oil prices to give up earlier gains. US West Texas Intermediate crude futures were down 1.2 percent at $33.95 per barrel.

Worsening relations between the world’s two biggest economies could further hobble global business activity, which is already under intense pressure due to the coronavirus pandemic.

E-Mini futures for the US’s S&P 500 index rose 0.4 percent, reclaiming the 3,000-point level. The index had cleared 3,000 points in Wall Street overnight before pulling back, as some traders returned to the New York Stock Exchange floor for the first time in two months.

Waiting for the hammer to fall

“The S&P 500 looked to be set to close above 3,000 until the late headline that the United States was considering a range of sanctions on Chinese officials and businesses should China go ahead with its legislation regarding Hong Kong,” analysts at the National Australia Bank said in a note.

“The extent of those possible sanctions is uncertain,” the analysts said.

Still, an index of the world’s top 49 stock markets stood near two and a half-month highs, having gained 2.6 percent so far this month on hopes of economic recovery in the developed world as countries ease restrictions to curb the spread of the coronavirus.

Economic data published on Tuesday showed US consumer confidence nudged up in May and new home sales beat expectations.

“We have seen a clear sign of rising expectations in economic recovery. Now we are beginning to see evidence of various stimulus supporting the economy,” said Toshifumi Umezawa, strategist at investment firm Pictet.

US Treasury yields retreated from lows, with 10-year yields at 0.692 percent, having risen by about four basis points on Tuesday.

Gold prices rebounded from losses as some investors played it safe, with spot gold unchanged at $1,710.9 per ounce.