U.S. stocks and high-beta currencies are rallying after both European and Chinese services PMI readings showed improvement and after Carrie Lam withdrew the Chinese extradition bill.
After a summer filled with protests, Hong Kong leader Carrie Lam will announce the withdrawal of the Chinese extradition bill at 6pm local time. The iShares MSCI Hong Kong (NYSE:EWH) posted its best gain since 2011 with a 5.4% surge, a rally that was much higher than three standard deviations. While the extradition bill was initially what sparked a tumultuous summer in Hong Kong, protesters’ demands have expanded to also include full democracy and police accountability.
Violence might ease in Hong Kong, but the protests are likely to continue until we see the other four demands met; Beijing accepting of Lam’s resignation, an inquiry into police brutality, the release for those who have been arrested and more democratic freedoms. Today’s withdrawal is quite the pivot from yesterday’s comments from China’s top office that hinted they could unilaterally declare a state of an emergency.
Hong Kong protesters seem focused on a September 8th rally that will petition US congress to pass the Hong Kong Human Rights decency, a possible major complication that could derail longer-term solution. Beijing’s concession here appears to have happened too late and we may just see temporary reprieve with Hong Kong assets.
Brexit
The UK prime minister lost his first parliamentary vote last night by a margin of 328 to 301. Whether the last name is May or Johnson, does not seem to matter, who ever lives at 10 Downing Street has an uphill battle. Parliament has taken a big step forward in ruling out a no-deal Brexit on October 31st. Boris Johnson however may call a general election, in what will require two-thirds of MPs support. The trainwreck that is Brexit continues and will only get worse as investors are unlikely to get any clarity anytime soon on how this will unfold.
Johnson did see a small victory in Scottish courts that will allow him to suspend Parliament. The overall concerns for economic growth in the UK are escalating after service growth stalls and possibly suggesting we could see the UK slip into a recession.
Oil
Oil prices are off their session highs after Iran noted that Europe has pledged to buy its oil and that they are working on wavers. It seems Europe is set on saving the 2015 nuclear deal and we could see a harsh response from President Trump. Oil could struggle moving higher if this does become a major turning point with tensions in the Persian Gulf. An easing of oil tanker risks and rising Iran oil production could mitigate much of the today’s overall risk-on rally that stemmed from optimism that one of the major geopolitical risk events in Hong Kong was showing a key turning point.
The focus will come to the continuing trend of falling US stockpiles and expectations are again for another multi-million barrel draw. Oil prices however remain focused on the trade war and the longer we don’t see a date scheduled for a face-to-face meeting between Chinese and U.S. officials, the greater the odds we could see a retest of the summer lows.
Gold
Gold is holding up fairly well despite a strong risk-on session that stemmed from the formal withdrawal of the Chinese extradition bill. It seems little can get in the way of gold’s rally right now as investors hesitate investing with negative interest rates and prospects of QE and fiscal policies grow as the major advanced economies become poised to fight off recession concerns.