(May 22): Stocks slid and U.S. equity futures retreated as investors braced for tensions between Washington and Beijing to escalate after China announced plans to impose a national security law on Hong Kong. Treasuries climbed with the dollar while oil snapped a six-day winning steak.
Insurance and mining companies led the Stoxx Europe 600 Index lower as contracts on the three main American equity gauges all pointed to losses on Wall Street. The risk-off tone took hold in Asia, where Hong Kong’s benchmark stock index plunged more than 5%. The yuan dipped as China’s National People’s Congress abandoned its decades-long practice of setting an annual target for economic growth amid uncertainty unleashed by the coronavirus pandemic.
See also: China to abandon numerical GDP target on 'great uncertainty'
The pound weakened for a third day as data showed retail sales in the U.K. dropped by almost a fifth in April. European government bonds were mixed, with spreads on peripheral debt widening. West Texas oil plunged as much as 9.4% before trimming its losses to trade just above US$31 (S$43.89) a barrel in New York.
The prospect of fresh turmoil in Hong Kong following sweeping national security legislation introduced by China comes as the relationship between the world’s two biggest economies appears to be souring. The S&P 500 closed lower on Thursday, with signs mounting that President Donald Trump will make his tough stance on China a key element of his re-election bid. Beijing responded to accusations from Trump, warning that it will safeguard its sovereignty, security and interests, and threatened countermeasures.
See also: China security law doesn't bode well for Hong Kong real estate, and China pledges to implement US trade deal amid rising tensions
It all risks choking the rally that took global equities up about 30% from the March lows, spurred by stimulus measures and optimism for a swift economic recovery from the virus.
“The geopolitical risks are meaningful,” David Riley, chief investment strategist at BlueBay Asset Management LLP said on Bloomberg TV. “It’s a concern for the market, is a potential source of weakness and a correction.”
Elsewhere, gold pushed higher. The Australian dollar dipped as Fitch Ratings Ltd. cut the country’s rating outlook to negative. Indian bonds rallied after an unscheduled rate cut. The Bank of Japan held its main rate while saying it will start a new lending program.
These are some of the main moves in markets:
Stocks
- Futures on the S&P 500 Index dipped 0.8% as of 9:18 a.m. London time.
- The Stoxx Europe 600 Index declined 1.3%.
- Germany’s DAX Index declined 1.2%.
- The MSCI Asia Pacific Index sank 1.9%.
Currencies
- The Bloomberg Dollar Spot Index jumped 0.5% to 1,247.55.
- The euro decreased 0.3% to US$1.0912.
- The Japanese yen strengthened 0.1% to 107.49 per dollar.
- The British pound declined 0.3% to US$1.2185.
Bonds
- The yield on 10-year Treasuries declined three basis points to 0.64%.
- Germany’s 10-year yield dipped three basis points to -0.50%.
- Britain’s 10-year yield decreased six basis points to 0.171%.
Commodities
- West Texas Intermediate crude sank 6.7% to US$31.64 a barrel.
- Gold strengthened 0.6% to US$1,736.85 an ounce.
