A volatile session in the rates market began early as Hong Kong chaos found itself in the middle of US-China trade tensions. Fixed income yields went in a straight line lower when the US Senate passed the bill supporting Hong Kong protests, and again after China reiterated that it would retaliate if the bill become law. E-minis dropped 10 points to 3111( where they are precariously perched a the time of writing).
These are the key rudders guiding the Phase one ship and the clearest signal for investment sentiment around US-Sino relations. As risk-off continued to build, Asian equities traded lower across the board.
USD/Asia has been better bid all morning following news around the Hong Kong bill as the market awaits the specificity around and expected retaliation by China if Trump signs the bill into law and likely killing any possibility of the trade deal progressing. So, we could see this long Asia currency position squeeze continue.
As far as local ASEAN currency appeal, with a bid under Gold, from a cross-regional currency perspective, the Thai Baht will continue to feature as the regional haven umbrella supported by Thailand’s substantial foreign exchange reserves.
Trump can veto the bill, sending it back to Congress, who can override his veto with a 2/3 majority vote, which should easily carry given the HK bill passed both chambers with an overwhelming majority.
This bipartisan support ultimately puts Trump between a rock and a hard place facing overwhelming domestic pressure to put the bill into law, but on the other hand, he wants the trade deal with China to happen.
Market View
In the absence of a credible and comprehensive trade deal roadmap, investors were already pricing in peak optimism around Phase one. They were turning more defensive to protect profits by taking chips off the table. But with the introduction of this Hong Kong Bill, future US-China trade discussions, if they continue at all, could be fraught with peril, so it makes sense for investors to at least buy some risk off insurance through convexity or even hedge into gold.Bonds are the go-to this environment as risk barometer has increased exponentially making it difficult to ignore even for the most ardent optimist. Oil prices and Phase one trade deal might as well be on the same vector as Oil prices remain anchored to investor trade war sentiment where pessimism paralysis is setting in again.
PBoC policy drip
The one positive in the gloom, the PBoC appears to be moving forward with a pro-growth tone, but the pessimist in me thinks this is all about insulating China from external concerns as this concerted policy drip is directed inwards and not the type of policy deluge that would support the global market. Looking at the lack of reaction in commodities markets I don’t think I’m alone in this view.