‘The Air Remains Thick With Caution’: Emerging Markets Stare Down Crises In Brazil, Hong Kong

As a group, emerging market equities were already struggling to keep up with the rebound in their advanced economy counterparts. Burgeoning crises in Hong Kong and Brazil appear poised to make the road ahead more arduous still.

A dramatic escalation in tensions between the US and China was made immeasurably worse late last week as Beijing moved to implement new national security laws in Hong Kong, sparking protests in apparent defiance of coronavirus protocol on Sunday.

National Security Advisor Robert O’Brien said the US will likely move ahead with sanctions if China doesn’t reconsider, which seems entirely unlikely. “It’s hard to see how Hong Kong could remain the Asian financial center that it’s become if China takes over”, O’Brien said on NBC’s “Meet the Press”.

Read more: ‘Cursed’ Hong Kong Is ‘Half-Way Dead’ Locals Say

He also reiterated concerns voiced by many locals about the extent to which the new laws will be the beginning of the end for the city as a global financial hub. “If [the rule of law and capitalism] go away, I’m not sure how the financial community can stay there”, O’Brien fretted. “They’re not going to stay in Hong Kong to be dominated by the communist party”.

No, probably not. But, as noted late last week, Congress faces a difficult decision. Stripping Hong Kong of its special status in retaliation will surely hurt the city and its business community far more than it will affect Beijing. Xi certainly knows that.

In addition to severe pressure on Hong Kong shares, other signs of stress are apparent in interbank markets and HKD forwards (see linked post above). “On May 22 USD/HKD options were the fourth-most traded globally, with total volume at a stunning 16 times the five-day average”, Bloomberg’s Mark Cranfield wrote over the weekend. “Not surprisingly there was significant demand for USD call options”, he added, noting that the MSCI Hong Kong index “will be closely watched as a gauge of sentiment [and] whether it can find support ahead of this year’s low of 11,226 could make a big difference for HKD assets in general”.

Meanwhile, the Trump administration announced travel restrictions on Brazil Sunday evening.

If it was “getting bad” in Brazil a few days go, it’s even worse now. The country has the world’s second-most confirmed infections (363,211 as of Sunday), and it goes without saying that the real total is actually far, far higher. Testing is wholly inadequate, and as discussed here last week, Jair Bolsonaro’s belligerent attitude towards the crisis is certainly not helping.

Over the weekend, Dias Toffoli, chief justice of Brazil’s Supreme Court, went on medical leave with symptoms resembling COVID. He tested negative as late as Wednesday.

Here’s the official word from Trump:

The Centers for Disease Control and Prevention (CDC), a component of the Department of Health and Human Services, working in close coordination with the Department of Homeland Security, has determined that the Federative Republic of Brazil is experiencing widespread, ongoing person-to-person transmission of SARS-CoV-2. As of May 23, 2020, the World Health Organization reported that the Federative Republic of Brazil had 310,087 confirmed cases of COVID-19, which is the third highest number of confirmed cases in the world.

The potential for undetected transmission of the virus by infected individuals seeking to enter the United States from the Federative Republic of Brazil threatens the security of our transportation system and infrastructure and the national security, and I have determined that it is in the interests of the United States to take action to restrict and suspend the entry into the United States, as immigrants or nonimmigrants, of all aliens who were physically present within the Federative Republic of Brazil during the 14-day period preceding their entry or attempted entry into the United States. The free flow of commerce between the United States and the Federative Republic of Brazil remains an economic priority for the United States, and I remain committed to facilitating trade between our nations.

Again, this is the last thing Brazilian assets need. Brazil is the not-so-proud owner of one of the world’s worst-performing stock markets and one of 2020’s worst-performing currencies.

One certainly imagines the move by Trump isn’t going to help, although there’s not necessarily a direct link between the White House’s new restrictions and beaten-down local equities.

All of this as emerging market stocks sit precariously near the lows relative to the S&P.

“The air remains thick with caution, and ASEAN and Hong Kong equity traders are buckling up for the second leg of declines in 2020”, Axicorp’s Stephen Innes said. “Beyond the HK law, investors will continue to focus on downside risk where the sobering level of stimulus from the NPC did not precisely exude platitudes of thanks from local and international investors”.

In the same interview with NBC Sunday, National Security Advisor O’Brien had harsh words for China on COVID-19.

“The cover-up that they did of the virus is going to go down in history, along with Chernobyl”, he mused. “We’ll see an HBO special about it ten or 15 years from now, so we’re in a different place with China as we speak today”.