The US Senate passed its Hong Kong Human Rights and Democracy Act after the market close last night, prompting retaliatory comments from both Hong Kong and China today resulting in a risk-off feel to trading during the Asian session.
Hong Kong says stop meddling
In response to the US Senate passing the bill, the Hong Kong government came out and said it was ungrounded and unnecessary, adding that foreign governments should not interfere in internal affairs.
The response from China was similar in nature, with the Chinese foreign ministry reiterating that it will retaliate if the bill is passed and urged the US to take measures to stop it. Nothing was mentioned about what form this retaliation might take, but markets are assuming that the Phase 1 trade negotiations could be a target.
Equity markets were beaten lower by the developments, with US indices dropping between 0.19% and 0.29%. The biggest under-performer was the Australia200 index, which slumped 0.72% amid weakness in the financial sector, led by Westpac. China shares lost 0.33% while the Hong Kong index dropped 0.54%.
The risk-averse strategy was also evident in the currency space, with the risk-beta Australian dollar falling 0.21% versus the US dollar and 0.28% versus the Japanese yen. USD/JPY fell 0.06% to 108.47, and could test the 55-day moving average at 108.19. That moving average has supported prices since October 10.
USD/JPY Daily Chart
China cuts prime lending rate
In a widely anticipated move, the People’s Bank of China cut its prime lending rate by 5 bps for both the one-year and five-year tenors. The one-year rate was reduced to 4.15% while the five-year was trimmed to 4.80%. The move comes in the wake of China cutting its seven-day reverse repo rate by 5 bps on Monday.
The move had little impact on sentiment, with the drivers mentioned above carrying a greater weight. USD/CNH rose 0.11% to 7.0354 and is now within sniffing distance of the 100-day moving average at 7.0428, which has capped prices on a closing basis for two weeks.
USD/CNH Daily Chart
FOMC minutes on tap
The highlight for the US calendar today will no doubt be the release of the minutes of the last FOMC meeting held on October 30 where the Fed cut rates by 25 bps. The message afterwards was that it was likely the last cut for a while unless the situation deteriorates rapidly. We’ll gain more insight about the discussions when the minutes are released.
Other than the minutes, it’s another quiet session on the data front with Europe focusing on the Bank of England’s inflation report hearings and German PPI data for October. Canada’s inflation numbers for October are also due along with a speech from ECB’s Lane.