A four-day rally that had lifted world stocks to near-record highs stalled on Thursday as a U.S. bill backing Hong Kong’s protesters became law, provoking China’s ire and threatening to derail an interim trade deal between Washington and Beijing.
Fading hopes of a rapprochement between the world’s two biggest economies before additional, potentially damaging tariff hikes kick in, also helped safe-haven assets such as U.S. and German bonds and lifted the yen from six-month lows.
The U.S. legislation, which threatens sanctions for human rights violations and seeks to safeguard Hong Kong’s autonomy, prompted China to warn of “firm counter measures”.
“The risk-off moves clearly reflect a concern this could be an impediment to the ‘Phase One’ trade deal which is now widely expected,” said Adam Cole, a strategist at RBC Capital Market.
Wall Street’s main indexes closed at record levels for a third straight day on Wednesday, albeit in thin liquidity before the Thanksgiving holiday, after data showed U.S. economic growth had picked up in the third quarter and consumer spending had increased.
Elsewhere, though, the outlook for growth looks less rosy. Japanese retail figures slumped the most since 2015 as a sales tax hike dragged on the economy, exacerbating a slowdown caused by slowing exports and manufacturing.
That took Asian shares excluding Japan down 0.2% .MIAPJ0000PUS. Japan’s Nikkei .N225, Hong Kong’s Hang Seng .HSI and Shanghai blue chips .CSI200 all closed weaker. A pan-European index opened 0.2% lower, led by trade-sensitive sectors such as autos and tech .SXAP .SX8P.
That kept MSCI’s world equity index flat, after it approached the record reached in January 2018. However, the index is up almost 3% so far in November and is on track for the best month since June as investors flit in and our depending on the trade news .MIWD00000PUS.
“People don’t want to be caught on the wrong side,” said Geoff Yu, head of the UK investment office at UBS Wealth Management. “It does reflect there’s cash on the sidelines. If you can stretch the positive narrative, if the trade issue is out of the way for the time being, we might actually see a demand pick up.”
U.S. markets are closed for Thanksgiving, but equity futures for all three major indexes were down around 0.3%.
HONG KONG AND BREXIT JITTERS
Jitters over a renewed Sino-U.S. fracas also showed up in currency and bond markets. U.S. bond markets are closed, but German yields fell to their lowest in nearly a month, down 1.5 basis points on the day DE10YT=RR
Japan’s yen, a currency investors flock to in times of trouble, gained 2% against the dollar JPY=D3, rising as high as 109.40 yen per dollar. The Australian dollar and the offshore Chinese yuan lost around 0.2% CNH=D3.
The British pound rose on Wednesday after a model for pollsters YouGov, which accurately predicted the 2017 election, said Prime Minister Boris Johnson was on course to win a majority in parliament at the Dec. 12 election.
However, the currency failed to build on its gains, trading around $1.294. It was flat versus the euro after surging to its highest in nearly seven months at 85 pence EURGBP=D3.
Implementing Brexit by the end of January, as Johnson had promised, would leave him a “miniscule” 11 months to agree a trade deal with the European Union, analysts at Societe Generale told clients.