Geopolitical tensions dented global stocks on Friday as investors braced for potential retaliation from Washington after Beijing approved a sweeping national security law for Hong Kong.
The S&P 500 slipped 0.6 per cent in lunchtime trading in New York as Wall Street extended falls that began late on Thursday. London’s FTSE 100 led European markets lower, closing down 2.3 per cent, while in Frankfurt the Xetra Dax dropped 1.6 per cent.
Investor optimism over the loosening of lockdowns is at risk of being overshadowed by tensions between the world’s two biggest economies.
US President Donald Trump was scheduled to hold a news conference regarding China at 2pm in Washington, after Beijing pushed ahead with legislation that has raised concerns about Hong Kong’s future as a financial centre. Critics warned that the new law would curtail political freedoms in the city.
Mr Trump, aside from tweeting “China!” on Friday morning, has given no indication of what he planned to announce.
“China has become a pariah, so options that wouldn’t have been considered even a few weeks ago are in the mix now,” said analysts at Cornerstone Macro. Possible options include raised tariffs, limits on US visas to Chinese citizens and increased arms sales to Taiwan, the broker said.
Hong Kong’s Hang Seng closed down 0.7 per cent as most markets in Asia-Pacific fell. The index has dropped more than 6 per cent in May, even as other major global bourses have rallied sharply.
The territory has emerged as a flashpoint between the two superpowers, with China threatening “countermeasures” against the US on Friday. When asked about possible actions, a spokesman for the ministry of foreign affairs referred to the US’s large trade surplus with Hong Kong.
“The important US financial institutions all have a presence in Hong Kong. The US has important interests in Hong Kong,” he said.
The onshore exchange rate for the renminbi, which investors have been watching as US-China friction intensifies, was little changed at Rmb7.14 per dollar. That was after the People’s Bank of China set the currency’s trading band stronger than analysts had expected.
“Recent [renminbi] fixings by the PBoC suggest an effort to dampen volatility — not drive the currency lower,” said Larry Brainard, chief emerging markets economist at TS Lombard. He added that the currency was set for “periodic bursts of volatility . . . but not of continuing steady depreciation”.
Oil prices dropped, but were off their worst levels of the day. Brent crude, the international benchmark, was down 1.1 per cent to $34.89 a barrel.
Government bonds rallied. The yield on the US 10-year Treasury slipped 0.044 percentage points to 0.661 per cent as investors moved into the debt.
Additional reporting by Yuan Yang in Beijing