(Bloomberg) -- For traders in some of the world’s biggest and most liquid markets, the pro-democracy protests in Hong Kong just took on a new significance.
Treasuries rallied and the yen strengthened on haven demand after China threatened unspecified “strong countermeasures” if the U.S. Congress enacts legislation supporting protesters in the Chinese territory.
Up to now, the worst political crisis in Hong Kong since its return to China had largely just impacted local stocks. While China and the U.S. may keep their disagreement over the city’s autonomy separate from the trade talks, the uncertainty over how this could escalate is now showing up in broader markets.
“This creates more risk for the trade deal,” said Patrick Armstrong, chief investment officer at Plurimi Wealth LLP. “China takes slights very seriously and anything viewed as a slight may derail the partial deal as it’s being branded. So it’s right that you’ve seen Treasuries rally.”
Treasury 10-year yields dropped as much as 5 basis points during Asian trading as the yen snapped a five-day losing streak, while S&P 500 Index futures fell. Emerging-market currencies also weakened in Asia.
China’s foreign ministry issued the warning Wednesday after the U.S. House passed the Hong Kong Human Rights and Democracy Act. That would subject the city’s special trading status to annual reviews and provides for sanctions against officials deemed responsible for undermining its “fundamental freedoms and autonomy.”
Both U.S. President Donald Trump and Chinese counterpart Xi Jinping have so far prevented the international uproar over the four-month long protests in Hong Kong from impacting talks. Trump said last week that he thinks the movement is winding down and that a trade pact will be great for the former British colony.
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