Markets were hit with something of a reality check on Wednesday, after the US Senate’s passage of a bill in support of the Hong Kong protesters dented previously ebullient sentiment. China reiterated its threat to retaliate and urged the US to take steps “immediately” to ensure it doesn’t become law.
Equities slid globally and 10-year yields in the US are suddenly back down to 1.75%, a three-week low. It wasn’t that long ago when a sustainable jump above 2% looked like a foregone conclusion.
That’s got the 2s10s riding what looks like its longest flattening streak since August, when it inverted, much to the chagrin of nervous markets.
Meanwhile, Hong Kong shares snapped an unlikely two-day rally. The Hang Seng had staged a world-beating gain of nearly 3% this week despite the escalating violence. On Wednesday, the gauge slipped.
Goldman is out warning that although the balance of risks still “leans toward lower tariffs”, there are two potential problems. One is obviously the Hong Kong bill. The other is the prospect that movement on the USMCA gives the administration some breathing room to escalate things with Beijing.
“Now that the Senate has approved the bill, the House could pass it fairly quickly. If so, it might reach the President’s desk in the next few weeks, potentially around the same time that US-China trade negotiations might conclude”, the bank wrote Tuesday evening, adding that “congressional approval of the US-Mexico-Canada Agreement might also relieve some of the political pressure on the White House to deliver an accomplishment on trade policy”.
Remember, Donald Trump isn’t likely to get any help from the Fed at the December meeting no matter what he does with regard to China, something Jerome Powell apparently reiterated at the White House on Monday.
“The catalyst for the risk aversion is renewed concerns about when and indeed whether a US/Chinese trade deal will be signed, after China protested at the US Senate passing legislation aimed at defending human rights in Hong Kong”, SocGen’t Kit Juckes wrote Wednesday, noting that “the less existing tariffs are rolled back, the less room there is for any further yuan appreciation (some tariff roll-back is already priced in) and the more markets worry about further tariffs being imposed the greater the fear will be that, as well as the economic damage of failure to reach a deal, we will see renewed yuan weakness”.
For their part, China rounded out November’s mini-easing push on Wednesday with cuts to both loan prime rate tenors. That means this month has seen the 7-day repo rate, the one-year MLF rate and the LPRs reduced, albeit by a token 5bps each. Some analysts see this as a template for the PBoC going forward.
At 5bps intervals, Beijing can deliver a lot of incremental easing, and while each move may not mean that much from a practical perspective, the cumulative signaling effect could be some semblance of powerful.
As for US equities, there are still plenty of mechanical factors that should work to keep things stable, but the passage of the Hong Kong bill is precisely what we meant on Tuesday when we wrote that “one shouldn’t underestimate the potential for myriad geopolitical powder kegs to throw things asunder”.