The news is dominated this morning by headlines from China. China’s National People’s Congress (CPC) in Beijing dropped its official GDP target for this year, for the first time in history. Far more significantly, the CPC said it would enact controversial security laws directly into Hong Kong’s Basic Law, bypassing the local legislature. The announcement was met by howls of protest from the United States, which has threatened retaliation. That followed increasingly aggressive trade barbs between the two sides overnight.
Hong Kong stock markets have fallen substantially this morning, also dragging down mainland exchanges. The very real threat now, is the return of mass protests to the streets of Hong Kong, a downgrade in trade status with the US, and potentially an exit of large companies from the SAR. Overhanging this, are concerns that China and the United States are about to engage in a new round of trade wards. In all honesty, the timing could not be worse by China, facing increasing calls for a more open investigation into the origins of COVID-19, and criticisms about leading Belt and Road borrowers into debt traps.
The inability of the United States and China to share the toys in the playground, while tiresome and somewhat despairing if you are not American or Chinese, should only be a large pothole in the road of the peak-virus rally in asset markets around the world. That will likely, at this stage, only be derailed by large scale secondary outbreaks of COVID-19 resulting in national and state lockdowns again. In the near-term though, trade-centric currencies, as well as equity markets, are likely to remain under pressure into the week’s end due to trade concerns.
Elsewhere, the Bank of Japan held an unscheduled meeting today. The BOJ announced a new special lending program to support business totalling JPY 75 trillion. The outcome was as expected though, and the market’s attention is most definitely elsewhere this morning.
Intriguingly, the Reserve Bank of India has also announced an unscheduled press conference at 0430 GMT. Announcing a severe downgrade to their growth outlook, they have announced an out of meeting cut to the repo and reverse repo rates to support growth. The repo has been reduced from 4.40% to 4.00%, and the reverse-repo drops from 3.85% to 3.45%
The data calendar is strictly second tier into the week’s end, leaving short-term direction to be driven by headlines. With the end of Ramadan upon us, the holiday calendar will be thick next week. Today, Indonesia, Malaysia and Brunei are on holiday.
Equities tumble on Hong Kong and trade woes
Regional equities were expected to trade lower today in any case, as Wall Street retreated overnight on increasing US-China trade fears. Those concerns have deepened following China’s announcement it would unilaterally write new security laws into Hong Kong’s Basic Law.
That has seen the Hang Seng tumble this morning, falling 4.50% as I write, and dragging the Shanghai Composite and CSI 300 1.0% lower with it. The Nikkei 225 has sunk 0.80%, with the trade sensitive KOSPI falling 1.50%. The story is much the same for Singapore, the Straits Times tumbling 1.85% today thus far. Australia has escaped the ructions in Hong Kong, but the ASX 200 and All Ordinaries are still 0.75% on the session.
Equities will remain under pressure in Asia today as China flexes its muscles and casts a cloud across the region. Much will depend on the response of the United States. Sanctions or increasing threats of reprisal could send equities lower again, although, in the bigger picture, the peak-virus rally remains structurally intact for now.
US dollar strengthens on haven buying
Trade nerves and apparent Chinese belligerence over Hong Kong has seen investors retreat to the safety of the US dollar this morning. The Dollar Index is trading 0.20% higher today at 99.60. The trade-sensitive Antipodeans have borne the brunt of the reversal, having rallied aggressively on the peak-virus trade over the last two weeks. The AUD/USD has fallen 0.45% this morning to 0.6565, and the NZD/USD has fallen by 0.40% to 0.6100.
Regional currencies have also given some ground with USD/SGD up 0.20% to 1.4200, and the Hong Kong dollar strengthening to the lower end of the USD/HKD band, trading at 7.7525 today. GBP/USD and EUR/USD are both slightly lower today in response. The USD/INR may rise following the RBI’s surprise rate cut.
As with equities, the news this morning is unlikely to derail the rotation into US dollars in the bigger picture.
Oil sinks on trade and political worries
Both Brent and WTI managed to record modest gains of 1.20% overnight. Still, escalating trade worries and China’s imposition of security laws on Hong Kong has bought the recent rally to a juddering halt. Brent crude has fallen 4.65% to $34.40 a barrel, and WTI has declined 6.00% to $31.80 a barrel.
Critical support for Brent crude lies at $32.00 a barrel and on WTI, at $30.00 a barrel. From a technical perspective, a daily close below those support zones suggests a deeper downward correction could occur. Oil may be in for a tough couple of days if the trade rhetoric between the US and China continues to ratchet higher.
Gold falls into a bull market trap
Before Grammarly ate my entire days’ work in an unrecoverable manner yesterday, I had intended to warn readers that gold risked a bull market trap leading to a downward correction. That was driven by gold failing to close above $1750.00 an ounce over the previous four days.
I am as surprised as anyone that my initial target of $1725.00 an ounce was reached overnight. Trade fears this morning have lent support to gold, which has climbed modestly to $1727.00 an ounce this morning.
Give the ructions in oil and equity markets today, golds performance has been underwhelming, to say the least. That suggests that there are still plenty of nervous longs out there selling into any rallies. If gold closes below $1725.00 today, that implies further losses to the $1700.00 an ounce region. Given the amount of long positioning that has flowed into gold recently, a much deeper correction to $1650.00 cannot be ruled out.