The good news is that the reopening narrative remains largely intact, as does the global stimulus story.
The combination of massive stimulus (both “delivered” and promised) and ongoing efforts to jump start economic activity in developed economies is powerfully bullish, especially for cyclicals and small-caps, which powered ahead again on Wednesday, after blockbuster outperformance during Tuesday’s post-Memorial Day rally. A simple two-session rate of change chart for relative performance of the most popular Value and Growth ETFs illustrates the point fairly well.
But this wasn’t all a rotation story on Wednesday. Part of the equation was underperformance by the tech heavyweights, due in part to Donald Trump, who threatened to “close down” America’s social media giants.
Twitter, Facebook, Google and Amazon were all lower in the hours after Trump’s broadside, delivered (unironically) via tweet. The Russell 2000 was on track to outperform the Nasdaq 100 for a fifth straight session.
Trump’s tech balderdash wasn’t the only wet blanket. Mike Pompeo indicated Wednesday that the US will not certify Hong Kong’s political autonomy going forward.
“Hong Kong does not continue to warrant treatment under United States laws in the same manner”, Pompeo said, in a statement, adding that “no reasonable person can assert today that Hong Kong maintains a high degree of autonomy from China, given facts on the ground”.
Those “facts on the ground” found hundreds of protesters arrested on Wednesday, as demonstrations continued against Beijing’s plan to enshrine mainland national security protocol into the city’s laws.
Pompeo’s declaration is an extension of the Hong Kong Human Rights and Democracy Act, which Trump (somewhat begrudgingly) signed into law late last year, amid relentless bipartisan pressure on the Hill.
In addition to requiring the US government to evaluate political autonomy at regular intervals, the Act (originally passed by the House in October) green-lighted sanctions against officials either in the city or on the mainland found to be involved in abductions or the curtailment of basic human rights.
In a new note, Jefferies says further escalations between the world’s two largest economies may prompt Chinese ADRs with a market cap of more than a half-trillion to migrate their listings to Hong Kong.
Wednesday’s statement by Pompeo came less than 24 hours after reports indicated the administration is considering a wide range of possible measures to punish Beijing for the new security law.
Trump has promised clarity on the path ahead by the end of the week. “It’s something you’re going to be hearing about”, he said Tuesday. “Very powerfully, I think”.
Meanwhile, China’s foreign ministry “very powerfully” warned Trump against any such action. “If anyone insists on harming China’s interests, China is determined to take all necessary countermeasures”, ministry spokesman Zhao Lijian cautioned. “The national security law for Hong Kong is purely China’s internal affair that allows no foreign interference”.
As ever, one struggles with the idea that the trade deal can go ahead in this environment.
In all likelihood, Trump will take targeted measures first, aimed at Party officials in Beijing. Revoking Hong Kong’s special status or applying the same tariff treatment to the city would be disastrous for the local business community at a time when nearly 12 months of protests plunged the economy into recession. The city suffered a record contraction in the first quarter, as the pandemic added insult to injury.
As if on cue, the Supreme Court of British Columbia said Wednesday afternoon that the extradition case against Huawei CFO Meng Wanzhou will proceed.
“As a matter of law, the double criminality requirement for extradition is capable of being met in this case”, the court said, in the ruling. “The effects of the US sanctions may properly play a role in the double criminality analysis as part of the background or context against which the alleged conduct is examined. Ms. Meng’s application is therefore dismissed”.