LONDON (Reuters) – World stocks took a hit and the Chinese yuan weakened on Friday as Beijing moved to impose a new security law on Hong Kong after last year’s pro-democracy unrest, further straining fast-deteriorating U.S.-China ties.
FILE PHOTO: A man wearing a protective face mask walks past the London Stock Exchange Group building in the City of London financial district, London, Britain, March 9, 2020. REUTERS/Toby Melville
These tensions plus news that China has dropped its annual growth target for the first time added to concern about the fallout from the COVID-19 pandemic, knocking oil prices down more than 4% LCOc1 and boosting safe-havens such as U.S. Treasuries US10YT=RR.
That followed a sharp selloff in Asia after China said it would impose new national security legislation on Hong Kong — sparking a warning from U.S. President Donald Trump that Washington would react “very strongly” against an attempt to gain more control over the former British colony.
Hong Kong’s Hang Seng index .HSI slid more than 5% to a seven-week low, its biggest daily percentage fall since 2015. MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS fell 2.7%, and Japan’s Nikkei .N225 closed down 0.8%.
U.S./China tensions have risen in recent weeks, with Washington ramping up criticism of China over the origins of the coronavirus pandemic.
“In the early stages of the recovery, the return of these old uncertainties will challenge the optimism that we have seen in world markets,” said Nordea chief analyst Jan von Gerich.
“Maybe if the tension was just between Hong Kong and China, the fallout might be limited, but we know this is also impacting the U.S./China relationship.”
Analysts noted that heavy central bank stimulus continued to underpin sentiment — MSCI’s world stock index .MIWD00000PUS, is up around 2.6% this week and set for its best week since early April.
Deutsche Bank strategist Jim Reid noted that it took more than 3-1/2 years between September 2008 and 2012 to “achieve” the $4.5 trillion cumulative expansion in G10 central bank balance sheet assets seen over the last 12 weeks.
“Overall it’s fascinating to see that markets are shaking off the very bad news on the future U.S./China relationship much more now in the face of a global pandemic than it did last year when the tensions were fraught,” he said.
“The relationship feels more in terminal decline now than it did 6-12 months ago. Maybe the answer to this puzzle lies in the central bank liquidity surge.”
Japan’s central bank on Friday unveiled a lending programme to channel nearly $280 billion to small businesses hit by the coronavirus. India slashed rates for a second time this year.
The souring in sentiment pushed China’s yuan to a more than 8-1/2 month low in onshore markets. Offshore, the yuan weakened to a two-month low at around 7.16 per dollar CNH=D3.
While anticipated, the news that China has not set an economic growth target for the first time since the government began publishing such goals in 1990, added to a sense that the coronavirus fallout is likely to be protracted.
Brent crude LCOc1 fell more than 4% to $34.47 a barrel, West Texas Intermediate (WTI) crude CLc1 dropped 5.6% to $32.03. [O/R]
The euro tumbled 0.5% against a broadly stronger dollar to $1.0893 EUR=; the dollar index =USD rose 0.4% to 99.801.
Elsewhere, benchmark 10-year U.S. Treasury yields fell 4 basis points to 0.64% US10YT=RR.
Short-dated British bond yields fell GB2YT=RR further below zero to new all-time lows, after data showed a record collapse in retail sales and the Bank of England said more bond purchases are “quite possible”.
Reporting by Dhara Ranasinghe. Editing by Jane Merriman, Kirsten Donovan