Global stocks slump as investors await Trump’s Hong Kong response

Global stocks fell and safe havens such as bonds and the Japanese yen rallied on Friday as investors awaited Washington’s response to China’s national security law on Hong Kong amid rising tensions between the world’s two biggest economies.

China’s parliament on Thursday passed national security legislation for the city, throwing its freedoms and its function as a finance hub into doubt.

US President Donald Trump said he would hold a news conference on China later on Friday. Trepidation about a further deterioration in Sino-US relations, which have soured considerably through the COVID-19 pandemic, put investors on edge.

US stocks followed European and Asian shares lower. The Dow Jones Industrial Average fell 180.15 points, or 0.71%, to 25,220.49, the S&P 500 lost 14.48 points, or 0.48%, to 3,015.25 and the Nasdaq Composite dropped 4.66 points, or 0.05%, to 9,364.33.

In Europe, the pan-regional STOXX 600 index lost 1.30% and MSCI’s gauge of stocks across the globe shed 0.59%.

Overnight in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.2%. Japan’s Nikkei retreated from a three-month high and the yen rose to a two-week high of 107.06 against the dollar, while bonds rose.

If the United States no longer thinks Hong Kong is sufficiently autonomous and no longer merits special treatment under US law, the reaction would be a small downdraft, as the market should be expecting that, said Yousef Abbasi, global market strategist at INTL FCStone Financial Inc in New York.

“But if you get further sanctions and something akin to walking back the Phase 1 trade deal, the concern has to be graver because now we have to worry about retaliation from China,” Abbasi said.

The Chinese yuan weakened in offshore trade. Hong Kong’s Hang Seng index declined 0.8% and has lost about 3% in the two weeks since news of China’s security legislation broke.

The yield on benchmark 10-year US Treasury notes fell 4.6 basis points to 0.6624%.

US Federal Reserve Chair Jerome Powell was scheduled to speak at 1100 a.m. EDT/1500 GMT. The market’s focus will be on the central bank’s long-term plans, including the likely restart of large-scale bond-buying.

Massive amounts of government stimulus offset reams of grim economic data to prop up stocks in May. The S&P 500 is up around 4% for the month and on track for its best May since 2009.

A rally in the risk-sensitive Aussie dollar is slowing, but the currency has gained nearly 2% for the month and sits 20% above March lows.

MSCI’s All Country World Index, which tracks stocks across 49 countries, is on track for a 3.5% gain this week - its best weekly performance since April.

Optimism has grown as countries have lifted lockdowns, spurring hopes for a speedy economic recovery.

The number of Americans seeking jobless benefits fell for an eighth straight week last week and New York has outlined plans for re-opening.

The euro was headed for its best month since December as the European Union’s 750 billion-euro coronavirus recovery fund fueled optimism about the EU’s political future. It hit a two-month high of $1.1114 and last traded at $1.1119. The dollar fell 0.366% against a basket of currencies. Spot gold added 0.8% to $1,731.92 an ounce.

US crude recently fell 0.33% to $33.60 per barrel and Brent was at $34.95, down 0.96% on the day. Both contracts are headed for their biggest monthly gains in years as production cuts and optimism about demand recovery led by China supported prices.

Oil prices were dragged sharply lower on Friday by weak US fuel demand, fears of a second wave of coronavirus cases in South Korea and a worsening in U.S.-China relations, but were still on track for a hefty monthly gain.

July Brent crude fell 61 cents, or 1.73%, to $34.68 a barrel by 1408 GMT while the more active August contract lost 58 cents, or 1.61%, to $35.45. US West Texas Intermediate (WTI) crude was down 44 cents, or 1.31%, at $33.27.

Both contracts were on course for their first weekly loss after four consecutive weeks of gains that leave them set for the biggest monthly advance in years thanks to production cuts and optimism over Chinese-led demand recovery, analysts said.

WTI is on track for a record monthly gain of 76% in May, with Brent set for a 37% increase that would represent its strongest monthly rise since March 1999.

Oil prices, however, are still down more than 40% since the start of this year and risks persist, including a supply glut and a further deterioration in U.S.-China relations over Beijing’s plan to impose national security legislation on Hong Kong.

“The global reaction to China’s move to propose new security laws for Hong Kong continues to increase, while there’s a score of new COVID-19 cases in South Korea,” said Rystad Energy’s head of oil markets, Bjornar Tonhaugend.

US President Donald Trump is due to announce his response to the situation in Hong Kong later on Friday. Thursday’s data from the Energy Information Administration showed that US crude oil and distillate inventories rose sharply last week. Fuel demand remained slack even as various states lifted travel restrictions they had imposed to curb the coronavirus pandemic, analysts said.

Agencies