Morning Markets Brief 5-22-2020

Summary and Price Action Rundown

Global risk assets are trading with a cautious tone this morning amid heightened US-China tensions, with Hong Kong in the spotlight as China prepares to clamp down on the territory. S&P 500 futures indicate a 0.2% lower open, which would further pare this week’s solid 3.0% gain, spurred by rising optimism over economic reopening and redoubled pledges of additional extraordinary monetary support from Fed Chair Powell. Year-to-date downside for the index is at 8.7% and the decline from February’s record high is 12.9%. Equities in the EU are also moderately lower while Asian stocks underperformed overnight as Hong Kong shares plunged (more below). Longer-dated Treasury yields are edging lower, with the 10-year yield at 0.65%, while the dollar is rising as growth concerns weigh on a number of peer currencies. Crude oil is reversing a portion of its sharp uptrend from recent lows, with Brent back below $35.

US-China Tensions Intensify Further Over Hong Kong

Relations between Washington and Beijing have deteriorated sharply this week, with Congress pushing legislation to counter China on a variety of fronts, President Trump turning up the rhetorical heat, Chinese media threatening retaliation, and pressure rising in Hong Kong. The benchmark stock index for Hong Kong plunged 5.6% overnight, falling to its lowest level since early April on the news that China will impose a stricter security regime on the territory, with the decision being finalized at this week’s National People’s Congress in Beijing. Democracy activists in the city are planning to resume street protests this weekend. President Trump made oblique comments on the impending crackdown, saying “if it happens, we’ll address that issue very strongly.” Meanwhile, two Senators introduced a bill to sanction Chinese entities and individuals that take part in enforcing the new security law in Hong Kong and punish banks that do business with them. For context, the Hong Kong Human Rights and Democracy Act, which was signed into law last year, requires the State Department to certify that Hong Kong is sufficiently autonomous from China for the city to qualify for favorable trading terms with the US. Tensions had already been rising after the US Senate passed a bill earlier this week with broad bipartisan support which could result in the eventual delisting of Chinese companies currently trading on US stock exchanges unless they pledge that they are not controlled by Beijing and submit an audit for inspection by the Public Company Accounting Oversight Board within three years. Speaker Pelosi said she would study the bill and analysts suspect that it will pass the House over the coming weeks and be signed by President Trump. Shares of US-listed Chinese tech giants sold off again yesterday despite the relatively lengthy timeline for any enforcement actions (three years at least). A report indicated that search engine giant Baidu is considering leaving the Nasdaq in favor of an Asian bourse listing.

Dollar Rises as Peer Currencies Sink on Growth Fears

After spiking higher amid the onset of the Covid-19 pandemic in March, the dollar has remained remarkably stable over the past two months, but analysts remain concerned that another leg higher could add to global deflationary pressures. Though the dollar remains in the middle of its two-month trading range against a broad basket of global currencies and a gauge of currency volatility has eased to its lowest level since early March, today’s appreciation demonstrates how weakness among its peers can lift the greenback. The renminbi declined 0.3% overnight versus the dollar, as traders cited the decision by China’s government to scrap its GDP target in light of great uncertainty due to the coronavirus. The renminbi is now at its weakest level versus the dollar since last October, during the height of US-China trade tensions. Meanwhile, the Australian dollar lost 0.5% overnight against its US counterpart as rating agency Fitch cut the country’s credit rating outlook from stable to negative, although it remains at the top tier AAA for now. Lastly, the UK pound is down 0.3% versus the dollar after April retail sales cratered 18.4% year-on-year, with futures markets continuing suggest that the Bank of England cuts interest rates into negative territory over the next year.

Additional Themes

Oil Prices Retreat Amid China Growth Concerns – Brent crude prices are retreating this morning from their highest level since early March as traders cite the Chinese government’s unexpected move to scrap its growth target, which late last year had been set at around 6%, down from 6-6.5% in 2019. The ongoing pickup in Chinese oil demand has been considered an important catalyst for the rally and an encouraging harbinger for a broader recovery in global energy usage as lockdowns ease in the US and EU, though analysts caution that high prices could also lift supply.

Looking Ahead – Next week, the holiday-shortened US calendar still features a number of major economic releases, featuring first quarter GDP and an array of April data, including new home sales, personal income and spending, durable goods orders, and PCE prices (the Fed’s preferred gauge of inflation pressure). For all our US readers, we hope you enjoy a pleasant Memorial Day weekend