Stocks gain on economic hopes, but Hong Kong risk clouds outlook

Australian shares rose 2.22% to the firmest in more than two months, while Japan’s Nikkei stock index rose 2.01% to the highest since late February as investors cheered the re-opening of economic activity in both countries.

US stock futures, S&P 500 e-minis, rose 0.36% on Thursday in Asia following another positive session on Wall Street overnight, highlighting the optimistic mood.

However, the biggest risk to equities is the Sino-US relationship, which is likely to worsen after US Secretary of State Mike Pompeo said Hong Kong no longer warranted special treatment under US law.

“The overall tone is in support of risk-on trades, and we can see less short-selling and more willingness to test the upside in equities,” said Yukio Ishizuki, FX strategist at Daiwa Securities in Tokyo.

“There remains a fair amount of concern about Hong Kong, but for now markets look like they will remain calm.”

The S&P 500 had closed above 3,000 for the first time in almost 12 weeks, bolstered by bank stocks, as investors hoped that the world economy can recover as it re-opens.

The S&P 500 has leapt about 36% since the global coronavirus pandemic dragged it to the year’s low on March 23, but there are concerns the rally may be overdone and susceptible to a protracted pullback.

The decline in Hong Kong stocks underscores some investors’ concerns about the strength of the recent rally in global equities.

Pompeo said overnight that China had undermined Hong Kong’s autonomy so fundamentally that the territory no longer warranted special treatment, a potentially big blow to the city’s status as a financial hub.

Some investors worry a punitive US response to China on the issue of Hong Kong could result in a tit-for-tat reaction from Beijing, further straining ties between the world’s two biggest economies and further hobbling global growth.

Yields on 10-year US Treasuries rose slightly to 0.6933%. Although 10-year yields are up from an all-time low of 0.4980% struck in March, they are still a whopping 120 basis points below highs seen in January.

Sources have said the US government may suspend Hong Kong’s preferential tariff rates for exports to the United States, a far less severe response than formally revoking Hong Kong’s special status under US law.

President Donald Trump said he will announce a response to China’s policies towards Hong Kong later this week.

Oil futures took a beating as investors fretted about Trump’s response to China. US crude dipped 3.41% to $31.69 a barrel. Brent crude fell 1.76% to $34.13 per barrel.

The offshore yuan was mired near a record low of 7.1966 per dollar due to uncertainty over Hong Kong’s future. In onshore trade, the yuan was near its weakest since September last year, which was during the height of the US-China trade war.

The euro, however, was buoyed by a 750 billion euro plan to shore up economies hammered by the coronavirus pandemic.

That pushed the euro to an eight-week high and by early Thursday, the common currency had nudged up to $1.1016, while the US dollar index was unchanged at 98.908.

Spot gold rose 0.27% to $1,713.54 per ounce as some investors opted for the safety of the precious metal.