Futures Slide, Yuan Tumbles, Hang Seng Plunges Most In 5 Years On Hong Kong Crackdown

S&P futures dropped alongside European and Asian stocks on Friday, while the Hang Seng index crashed 5.6%, the most in five years, as markets braced for an escalation in tensions between Washington and Beijing after China announced plans to impose a national security law on Hong Kong during its National People's Congress. Treasuries climbed with the dollar while oil snapped a six-day winning steak.

Still, Wall Street’s main indexes were set to end Friday with weekly gains on the back of stimulus hopes and optimism over a pickup in business activity with a nationwide easing in lockdowns.  Hewlett Packard Enterprise fell 7.1% in premarket trade after missing second-quarter revenue and profit estimates, hit by global lockdowns since February.

China moved on Friday to impose a national-security law in Hong Kong that could see mainland intelligence agencies set up bases in the global financial hub, raising fears of more pro-democracy protests. The move could also ratchet up U.S.-China tensions as President Donald Trump on Thursday warned Washington would react “very strongly” if Beijing went ahead with the law.

After rising above the key resistance level of 2,950 in the Thursday cash session, ES once again slumped below it dropping as low as 2905 before rebounding following the European open, if still holding on to losses while food and mining companies led the Stoxx Europe 600 Index lower. The risk-off tone took hold earlier in Asia, where Hong Kong’s benchmark stock index plunged more than 5%, its biggest drop since July 2015.

Also at the NPC, Chinese Premier Li announced the Government Work Report did not contain a GDP target for 2020 citing global pandemic and uncertainties for global economy and trade, but stated that China will make policy more flexible and will use policy tools such as open market operations, interest rate cut, RRR cut, re-lending and re-discount to keep liquidity reasonably ample. Furthermore, Li stated China is to issue CNY 1tln in special bonds this year and will cut tax and fee burdens for companies by CNY 2.5tln this year although noted China faces unprecedented risks and challenges. China also reiterated its intent to implement phase one of the trade deal with the US despite recent tensions between the two nations.

European stocks drifted lower, led by commodity-related equities such as miners and energy companies after China announced plans to impose a national security law on Hong Kong, while for the first time ever scrapping a GDP target, disappointed investors. Stoxx 600 basic resources dropped as much as 3.1%, dragged lower by miners: Rio Tinto -2%, BHP -2.3%, Glencore -3%, Anglo American -3%; Steelmakers also declined ArcelorMittal -3%, Evraz -2.5%, despite ArcelorMittal raising prices in U.S. Gold miners outperform: Polymetal +0.4%.

Asian stocks fell, led by finance and energy, after falling in the last session. All markets in the region were down, with Hong Kong's Hang Seng Index dropping 5.6% and Singapore's Straits Times Index falling 2.2%. Trading volume for MSCI Asia Pacific Index members was 14% above the monthly average for this time of the day. The Topix declined 0.9%, with I'rom Group and Fields falling the most. The Shanghai Composite Index retreated 1.9%, with Wuxi Hongsheng Heat Exchanger Manufacturing and Yangyuan Zhihui posting the biggest slides.

In rates, yields dropped, richer by 0.5bp to 4bp across the curve into early New York trading, holding most of their bull-flattening move during Asia session. Advance was spurred by the prospect of renewed political turmoil in Hong Kong after China introduced sweeping national security legislation, setting up a collision course with the U.S. 10-year TSY yields are lower by more than 2bp at ~0.645% while new 20-year bond continues to outperform; curve flatter with 2s10s, 5s30s spreads tighter by ~2bp. Gilts also in focus, outperforming bunds over European session after BOE policy maker Ramsden said more QE is possible at the June meeting, has an open mind on negative rates.

In FX, the Bloomberg Dollar Spot Index headed for its biggest rise in two weeks and Treasuries gained as investors braced for rising tensions between Washington and Beijing. The Australian weakened against most G-10 peers as sentiment was damped by China-Hong Kong tensions; the Norwegian krone led losses, tracking the drop in oil.

The yuan plunged to a 2 month low as China’s National People’s Congress abandoned its decades-long practice of setting an annual target for economic growth amid uncertainty unleashed by the coronavirus pandemic. The pound weakened for a third day as data showed retail sales in the U.K. dropped by almost a fifth in April.

Many are asking what happens next, with the emerging consensus that China will allow the Yuan to drift lower to 7.20 in response to any moves by the US.

"China’s move on legislation about Hong Kong and the risk of further deterioration in U.S.-China relations is worrying for market players,” said Masafumi Yamamoto, chief currency strategist at Mizuho Securities Co. in Tokyo. "They’re are keen to see how big an economic stimulus China may provide, which would affect risk-sensitive currencies such as the Aussie."

In commodities, oil plunged, with Brent tumbling as much as $3 from Thursday's high of $37, before settling around $34.50. West Texas oil plunged as much as 9.4% before trimming its losses to trade around $32 a barrel in New York. Base metals slumped in London on China fears: copper -2%, aluminum -1%, nickel -5%, zinc -1%; iron ore -0.7% in Singapore; gold +0.7%. Citi sees lower copper prices in the near term, as global surplus meets lower Chinese physical and speculative activity, but expect $5,800/t on a 6-12 month view as the market rebalances driving prices up the rising cost curve

Looking to the day ahead now and there are less data highlights. The UK and Canada will release retail sales data, which are likely to continue to show the deterioration caused by the pandemic. From central banks, the ECB will be publishing the account of their most recent monetary policy meeting and will grab some attention. Finally, as usual there are fewer earnings releases on Friday, but two important ones for the macro-environment include Deere & Company and Alibaba.

Market Snapshot

  • S&P 500 futures down 0.7% to 2,917.00
  • STOXX Europe 600 down 1.1% to 336.50
  • MXAP down 2% to 145.25
  • MXAPJ down 2.7% to 465.00
  • Nikkei down 0.8% to 20,388.16
  • Topix down 0.9% to 1,477.80
  • Hang Seng Index down 5.6% to 22,930.14
  • Shanghai Composite down 1.9% to 2,813.77
  • Sensex down 0.9% to 30,649.13
  • Australia S&P/ASX 200 down 1% to 5,497.03
  • Kospi down 1.4% to 1,970.13
  • Euro down 0.4% to $1.0910
  • Brent Futures down 5.2% to $34.17/bbl
  • Italian 10Y yield fell 1.9 bps to 1.441%
  • Spanish 10Y yield rose 1.0 bps to 0.643%
  • Brent Futures down 5.3% to $34.16/bbl
  • Gold spot up 0.6% to $1,736.71
  • U.S. Dollar Index up 0.4% to 99.73

Top Overnight News from Bloomberg

  • Asian, European shares slid and futures retreated in the U.S. as China announced plans to impose a national security law on Hong Kong, which threatened to further escalate tensions between Washington and Beijing
  • The Chinese government abandoned its decades-long practice of setting an annual target for economic growth amid the storm of uncertainty unleashed by the coronavirus pandemic, and said it would continue to increase stimulus
  • Britain posted a record budget deficit in April as the government unleashed an unprecedented package to prevent the collapse of the virus-stricken economy
  • Oil retreated from the highest level in more than two months as doubts over the strength of China’s economic recovery and geopolitical tensions ate away at its weekly advance
  • Bank of England Deputy Governor Dave Ramsden added his voice to the chorus of policy makers refusing to rule out negative interest rates in the U.K.

Asian indices weakened as markets digested today's key events including the BoJ off-schedule meeting and start of China's NPC where it omitted setting a GDP growth target for this year due to the coronavirus pandemic, as well as uncertainties surrounding economy and trade. ASX 200 (-1.0%) declined with energy names pressured by an aggressive pullback in oil prices and with sentiment subdued after Fitch revised its outlook on Australia’s sovereign rating to negative from stable, while Nikkei 225 (-0.8%) suffered the ill-effects of a firmer currency despite the BoJ’s announcement of a new measure to boost lending to small and mid-sized businesses impacted by the coronavirus in which it set aside JPY 75tln for its new loan programme but which was widely anticipated. Hang Seng (-5.6%) and Shanghai Comp. (-1.4%) were lower amid the start of China’s Two Sessions conclave where the Government Work Report refrained from setting an economic growth target but pledged to reduce tax and fee burdens for companies by CNY 2.5tln this year and use several tools to keep liquidity ample. Furthermore, the losses in Hong Kong were exacerbated after China’s attempts to tighten its grip on the Special Administrative Region through a new national security law, and is likely to stoke further unrest for the region which had already been mired by months of protests since the middle of last year. Finally, 10yr JGBs were relatively uninspired with only mild upside seen despite the downbeat risk tone and upside in T-notes, while the conclusion of the BoJ’s emergency meeting and announcement of a new lending scheme also failed to spur any meaningful price action.

Top Asian News

  • China Will Improve Hong Kong’s Security Laws, Premier Li Says
  • Hong Kong Stocks Haven’t Suffered This Much Since 2008

European majors trade mostly negative (Euro Stoxx 50 -0.3%) but have drifted off lows following a dismal APAC handover in which the Hang Seng was pummelled by the prospect of a resurgence in violent pro-democracy protests, whilst Chinese markets were dragged lower in sympathy as the nation is on course for further escalation with the US and as the NPC did not provide a GDP growth target for the year. Back to Europe, peripheries fare better than the core markets, whilst the FTSE 100 (-0.9%) and SMI (-1.4%) lag European peers, albeit the former weighed on by energy, materials and financials and the latter more-so on catch-up play. Sectors are red across the board but do not reflect a clear risk tone as specific sectors take hits on Hong Kong woes - with Financials and Energy underperforming, the latter amid price action in the complex and the former dragged by a lower yield environment alongside Hong Kong-exposed banks plumbing the depths; HSBC (-5.4%) and Standard Chartered (-4.0%). The wide US-China implication and downbeat sentiment prompts materials sector to trade on a poor footing. Fears of protests also see luxury names on the backfoot; LVMH (-1.2%), Kering (-1.2%), Richemont (-3.1%), Swatch (-1.1%) hold onto losses. In terms of other individual movers: Burberry (+1.8%) holds onto gains after the Co. said it can weather the pandemic with a strong balance sheet and protected liquidity. Renault (-2.0%) opened weaker amid little progress with the French gov’t on state aid; Co. are due to meet with Finance Minister Le Maire today.

Top European News

  • U.K. Budget Deficit Largest Since Modern Records Began in 1993
  • Putin Presses Plan to Extend Rule Amid Crisis Hurting Russians
  • Credit Suisse Targets Luckin Ex-Billionaire’s Family Assets

In FX, USDCNH was not the biggest move in percentage terms, but pertinent in the context of gauging the rising level of US-China angst as the pair climbs to highs not seen since March above 7.1600, and closer to record peaks in early September last year when trade wars were raging. Moreover, confirmation that Beijing is not setting an official 2020 growth target and the NPC drafting legislation on national security for Hong Kong have ruffled the Yuan, with the latter also adding yet another point of dispute to the increasingly long list jeopardising already strained relations between the 2 nations. In terms of the wider repercussions, risk sentiment has deteriorated further to the benefit of the Greenback above all rivals bar the Yen, as the DXY extends its rebound from recent lows and at least 2 close scrapes with the 99.000 level to a 99.838 high, and still seemingly on the up.

  • AUD/CAD/EUR/GBP/NZD - No surprise to see the Aussie bearing the brunt of the latest Washington-Beijing spat, especially as the Hong Kong Dollar is pegged, but Aud/Usd and Aud/Nzd have also retreated in response to Fitch downgrading the sovereign’s triple A ratings outlook to negative from stable. The former is now hovering nearer 0.6500 from 0.6600+ yesterday and the latter is down through 1.0700 compared to a 1.0830 apex earlier in the week, as the Kiwi manages to stay within sight of 0.6100 against its US counterpart following comments from NZ Finance Minister Robertson about formative discussions on the topic of helicopter money. Meanwhile, the Euro has handed back more gains vs the Buck after its fleeting or false break over the 1.1000 mark on Thursday and has been back under the round number below, but not quite far enough to stir hefty option expiry interest between 1.0885-75 in 2.8 bn. Elsewhere, the Loonie has lost its oil prop and trying to contain declines through 1.400 ahead of Canadian retail sales data, and on that very note Cable is straddling 1.2200 and the Eur/Gbp cross 0.8950 after weaker than expected UK consumption rattled Sterling somewhat more than equally bad public sector finances and tripped some stops in the former at 1.2180. However, underlying bids said to be sitting from 1.2160 to 1.2150 have not been troubled so far.
  • JPY/CHF - As noted above, the Yen is marginally outperforming vs the Greenback, albeit still rangebound either side of 107.50 and only retaining an element of safe-haven premium after no shocks from the inter-schedule BoJ meeting or more recent joint statement from Governor Kuroda and Japanese Finance Minister Aso expanding on the rationale behind new bank lending provisions. Conversely, Usd/Chf remains elevated on the 0.9700 handle, but the Franc is still unwinding losses relative to the Euro and probing 1.0600 ahead of the ECB minutes (full preview available via the headline feed) and next Monday’s Swiss bank sight deposit balance update.
  • EM - Aside from broad depreciation on risk aversion, the Indian Rupiah got an unexpected 40 bp RBI rate cut to contend with, though Usd/Idr has reversed after a knee-jerk jump to trade lower on the day.

In commodities, WTI and Brent front month futures experience substantial intraday losses as sentiment takes a hit from developments regarding the Hong Kong legislations as well as wider implications such as escalating trade tensions with the US and souring sentiment with the UK. As such, clear risk aversion is seen – with WTI and Brent July around USD 31.50/bbl and 34/bbl, down around 7% and 5% respectively and with current bases at USD 30.70/bbl and USD 33.50/bbl respectively. Spot gold sees haven demand, residing towards the top-end of its USD 1725-38/oz current range. Copper prices gapped lower below USD 2.4/lb and holds onto sentiment-driven losses, with some also attributing the downside to China refraining from assigning a GDP target.

US Event Calendar

  • Nothing major scheduled

DB's Jim Reid concludes the overnight wrap

Today is the last Corona Crisis Daily unless we see a resurgence of case numbers. Let’s hope not. In our last edition we part with some stats comparing US fatalities between February 1st and May 16th this year for flu and covid-19. Interestingly in all age buckets up to at least 24yrs old, flu has killed more people (141 total) than covid-19 has (27). In the 25-34 year bucket the numbers pivot and are 138 versus 463. By the time we get to the over 55 year olds the divergence is stark with 5,184 dying of flu against 63,923 for covid-19. Across all ages more people have died of pneumonia though than covid-19 in the US over this period. Hopefully we’ve been balanced in our reporting on covid-19. One of the key themes we’ve tried to highlight over the last couple of months or so is how savagely discriminant covid-19 is, especially by age. It’s staggering given that flu is seemingly more deadly for under 24 year olds and is also staggering how susceptible the elderly and those with underlying conditions are relative to the young. Why the young are so spared is a welcome mystery. However as we increasingly understand this about the virus it surely gives the global politicians more options going forward as to how to protect economies from a second wave. Good luck to them.

Moving on to markets now and for a second day in row, US President Trump escalated the rhetoric war with China, specifically criticizing the country’s leadership. Then later in the day Trump posted a letter to Congress on the “Strategic Approach” to China, saying that the US, “has adopted a competitive approach to the People’s Republic of China, based on a clear-eyed assessment of the Chinese Communist Party’s intentions and actions, a reappraisal of the United States’ many strategic advantages and shortfalls, and a tolerance of greater bilateral friction.” Lastly on China, the country is proposing a new security law in Hong Kong that could ban sedition, secession and treason. This will likely draw a large amount of opposition given the pro-democracy protests in the country over the past year. This could be another wedge between China and the US, given how many US politicians on both sides of the aisle supported HK’s efforts last year. The China-US headlines were accompanied by news that the Trump administration is moving to withdraw from the Open Skies treaty, a nearly 30 year old accord meant to reduce tensions between Russia and the West, citing a lack of adherence by the Russians.

Risk markets reacted negatively to the political uncertainty as economic data continued to show that recovery from the virus-induced lockdowns may not be as sharp as markets are pricing. The S&P 500 fell -0.78% although it was off the session lows of -1.11% just as Europe went home. Or at least left the home office and went to the kitchen if they weren’t already there on holiday. For the activity that was there in Europe, stocks fell on the further agitation with the Stoxx 600 down -0.75% on lower volumes (down -17% from the 30-day average) with much of Scandinavia and the Swiss markets closed and France and Germany observing the public holiday albeit with markets thinly trading. Oil continued to rally though, albeit at a slower pace, with WTI futures up +1.28% and Brent crude rallying +0.87%.

Overall it’s fascinating to see that markets are shaking off the very bad news on the future US/China relationship much more now in the face of a global pandemic than it did last year when the tensions were fraught but most likely still pointing towards a trade deal at some point. The relationship feels more in terminal decline now than it did 6-12 months ago. Maybe the answer to this puzzle lays in the central bank liquidity surge. DB’s Alan Ruskin yesterday updated his aggregated key country central bank liquidity charts (link here) where he showed that rolling 12 month central bank liquidity is already running double the peak it reached at any point during the GFC. It took more than three and a half years (September 2008 thru and into 2012) to ‘achieve’ the $4.5 trillion cumulative expansion in G10 central bank balance sheet assets that we have seen over the last 12 weeks. Worth having a look at the graphs. All fairly remarkable.

Staying with stimulus, DB’s Peter Sidorov updated his latest excellent G-20 policy response document yesterday ( link here ) which actually shows that G-10 central bank balance sheets have now gone well above $20 trillion from over $16 trillion before the crisis. When you include total G-20 central bank measures already injected or promised so far it amounts to around $9 trillion. The piece also includes details of fiscal commitments from every one of these countries. Italy and Germany are the top of the list for combined fiscal above and below the line (guarantees etc.) commitments.

One of the main beneficiaries of this liquidity has been bonds as they’ve stayed firm during the strong risk on over the last two months. In the small risk off seen yesterday they rallied again. US 10yr yields were -0.8bps lower at 0.672%, while German bunds fell -2.7bps to -0.50% and Gilts fell -5.8bps to 0.17%. Both Gilts and US Treasuries are now roughly back to around 11bps from all-time lows. Peripheral spreads widened slightly (1-2bps) during a week of increased tightening. Safe havens were not uniformly higher, as gold had its worst day since 30 April falling -1.21%.

Overnight, the text of China’s Premier Li Keqiang’s annual policy address has confirmed that the country is indeed abandoning its GDP growth target for this year. The text specifically states that, “I would like to point out that we have not set a specific target for economic growth this year” and “this is because our country will face some factors that are difficult to predict in its development due to the great uncertainty regarding the Covid-19 pandemic and the world economic and trade environment.” The text of speech also contained announcement of plans to impose a national security law in Hong Kong which as we noted above will only add to tensions between the US and China. The Hang Seng is trading down -4.61% on the back of this and as you’ll see below, appears to be dragging other markets lower too.

China has also set the target for the urban surveyed unemployment rate of around 6%, higher than 2019’s goal and proposed a wider budget deficit at 3.6% of GDP (vs. 2.8% of GDP in 2019). In terms of policy, fiscal was smaller than what our economists expected while there were strong signals on monetary, “specifically higher than last year”. Finally, the government said explicitly that it will “mutually enforce the phase on trade deal with the US”. More support has also been granted to SMEs. See the full summary from our economists here.

The Shanghai Comp and CSI 300 are down -1.31% and -1.59% respectively in the wake of that and the Kospi -1.46%, while there are more modest losses for the Nikkei (-0.76%). Meanwhile, futures on the S&P 500 are down -0.60% while yields on 10y USTs are down -2.5bps. Elsewhere, WTI oil prices are down -6.93% this morning while iron ore is up +1.34% continuing its winning run since April 29th.

In a busy overnight session, the BoJ’s unscheduled monetary policy meeting has ended with key interest rates and asset purchases unchanged. The central bank instead launched a new lending program worth JPY 30tn to support small businesses struggling amid the coronavirus in order to prevent bankruptcies. The program is due to run through March next year and will channel money to companies via commercial banks and other financial institutions. Also, like the other BoJ facilities, the facility will encourage lending to companies by providing free loans to financial institutions and then paying them 0.1% interest on the amount they in turn lend out. In other overnight news, Fitch revised the outlook for Australia’s credit rating to ‘negative’ from ‘stable’ citing that “Government spending in response to the health and economic crisis will cause large fiscal deficits and a sharp increase in government debt/GDP.”

In a busy week for the Fed Chair, Jerome Powell spoke with Fed Governor Brainard at a live-streamed “Fed Listens session” to get feedback from small-business, labour, and non-profit organization leaders over their policy stances. In remarks that could be used by lawmakers to push for further stimulus, Powell said, “While the burden is widespread, it is not evenly spread…Those taking the brunt of the fallout are those least able to bear it.” Fed Vice Chair Clarida also spoke yesterday, and echoed recent calls for further fiscal stimulus, but thought that the economy would show signs of growth sometime after June.

Looking at the economic data yesterday, US initial jobs claims registered another 2.44m people for the week ending May 16, down from last week’s 2.69m. This was slightly above the consensus forecast of 2.4m. Continuing claims are now at a record 25.1m through the week ending 9 May – this in turn takes the insured unemployment rate to 17.2%. The good news is that initial jobless claims have now fallen for 7 straight weeks, but they are still at least triple the previous highs.

The other big data of the day was the flash PMIs for May. This month, metrics rebounded slightly but remained in deep contraction territory. The Eurozone composite PMI registered 30.5, up appreciably from the 13.6 reading in April and above consensus at 27.0. On the country level, France had one of the bigger recoveries with composite PMIs rising from 11.1 in April to 30.5 in May, still slightly under consensus at 32.4 though. Germany’s flash composite PMI for May was 31.4, up from 17.4 in April but below the consensus estimate of 33.1. The UK’s composite PMI was at 28.9, well above consensus at 25.7 and April’s 13.8 reading.

On the other side of the Atlantic, the US composite PMI was 36.4, up from 27.0. The country did not register as large a fall in April, and so the rebound was not as sharp. Remember again that PMIs are diffusion indices, where respondents simply say whether things are better or worse than last month, and so during extreme events they don’t necessarily give the most accurate picture on the scale of the declines or rebounds when they happen, though direction still matters.

Looking to the day ahead now and there are less data highlights. The UK and Canada will release retail sales data, which are likely to continue to show the deterioration caused by the pandemic. From central banks, the ECB will be publishing the account of their most recent monetary policy meeting and will grab some attention. Finally, as usual there are fewer earnings releases on Friday, but two important ones for the macro-environment include Deere & Company and Alibaba.