Global stocks risk off as Beijing considers new Hong Kong security law

Equities

Shares in Hong Kong plunged overnight on fears a tougher stance from Beijing’s towards the territory will spark fresh pro-democracy protests, potentially leading to the kind of wide scale unrest witnessed last year.

The Hang Seng slid over 5%, notching its worst daily decline in 5 years, as China’s National People’s Congress (NPC) moved to impose controversial national security legislation in Hong Kong, bypassing local lawmakers.

Markets unsettled as China plans new Hong Kong security law

China’s Communist Party wants to impose a national security law that would ban “treason, secession, sedition and subversion”.

The plan was detailed at the NPC on Friday, triggering fears that Beijing will end freedoms for people in Hong Kong not enjoyed elsewhere in China. As well as big losses for the Hang Seng, European and US stock market futures fell deep into the red ahead of the European open.

Carrie Lam, the pro-Beijing chief executive of Hong Kong, says the territory will fully cooperate with China.

Beijing’s Hong Kong plans send stocks tumbling – but why now?

Under terms of the handover from the British in 1997, Hong Kong is required to pass national security laws but has so far not done so.

Hong Kong’s first chief executive Tung Chee-hwa tried and failed to pass national security laws in 2003, sparking protests that ultimately ended in his resignation.

Lately Chinese officials have become worried it lose its grip on Hong Kong with new elections due in September.

Last November pro-democracy candidates won handily in district council elections, raising fears in Beijing that this would be replicated in Legco elections this autumn.

This followed several months of unrest and civil disobedience against a planned extradition bill – later abandoned – which caused Hong Kong’s economy to tank and local stocks to tumble.

How Hong Kong-Beijing tensions could impact global stock markets

This is a significant flash point that will stir local protests and anger the US.

Unrest last year caused Hong Kong to fall into recession for the first time in ten years, with GDP contracting 3.2% in the July-September quarter as tourists steered clear of the territory.

The unrest also caused business sentiment to sour – a repeat would be an unwelcome development for the likes of Asia-focused banks HSBC and Standard Chartered.

Investors will need to add renewed Hong Kong-Beijing tensions into their mix of geopolitical risks, and it is the way it fits into the broader US-China rivalry that is more of a worry for investors.

Equities face new geopolitical risks as China-US relations sour further

At a time of already strained relations between China and the West, this decision will only isolate Beijing even more.

US President Donald Trump he would “address that issue very strongly” if Beijing passed the law. The White House has already started to stiffen its resolve against China for what it sees as the country’s failure to contain the Covid-19 outbreak.

Republican and Democratic Senators plan to introduce legislation to impose sanctions on Chinese officials if the law is passed.

Meanwhile US-China trade tensions remain on the table and with the US presidential election this November coming at a time of immense economic dislocation, the relationship between Washington and Beijing looks set to only get worse.

Risk offered into the weekend

Commodities
Equities
Forex
Indices

A number of factors have conspired to create a more risk-off tone to the end the trading week than we saw at the start of the European session.

Although European indices are just about holding the line, US futures are indicated lower and we may see the S&P 500 retest the lows under the 50% retracement level at 2790. The Dow is indicated -200pts.

The FTSE 100 has retreated sharply from the morning highs of the day and may well stutter into the close should Wall Street drag sentiment down. The DAX is also well off the highs though still positive, the CAC is already weaker, and the Euro Stoxx 50 is flat. US indices are already set for their worst week since the middle of March. Key test at yesterday’s lows at 2,766 for SPX.

In FX, the Japanese yen was the strongest and kiwi was the weakest. Sterling sank to its weakest since late March. Gold has broken out above the Apr 24th peak and now has the $1747 region its sights. A breakout above $1750 could see the next leg higher to $1800.

US retail sales were even worse than forecast in April, sliding 16.4% vs 12% expected. Core retail sales fell 17.2% vs 8.6% expected. Trying to read too much into individual data points in the current environment is exceptionally tough, but the optics from these figures are hardly reassuring.

US-China relations sour by the hour, with the White House moving to block semi-conductor shipments to Huawei. Reports suggest China is looking at retaliation with measures against US companies like Apple, Qualcomm and Cisco. I think we can assume a ratcheting up of pressure on China by the Trump administration in the coming weeks.

UK-EU relations are also looking very risk-off. GBP is now in full RoRo mode and cable made fresh two-month lows as it breached the April 6th support at 1.2160 to test 1.2150. It looks like real stalemate.

The UK is refusing to countenance the EU’s level playing field demands. Britain also said it would refuse any offer to extend the transition period. Both Frost and Barnier sounded downbeat on the prospects of a deal. Barnier said the positions are extremely divergent, Frost said very little progress has been made.

A lot to do to avoid the dreaded no-deal – downside risks for GBP clearly evident. The pound is already beaten up pretty badly due to the wider macro outlook as a risk-on currency these days, and the Brexit risk has reared its head again to impart more pressure.

Advisory note – Trump as ever is the wildcard and we have Rose Garden update on a vaccine from the president at some point today.

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