(Bloomberg) -- Global markets are finally needing to take notice of the rolling protests that have been simmering in Hong Kong for months, with haven assets the main beneficiaries as tensions complicate prospects for a U.S.-China trade truce.
Developed-nation bonds extended recent gains and other refuges such as gold and the Japanese yen advanced Wednesday after a move by the U.S. Congress to voice support for Hong Kong demonstrators drew a threat from China to impose unspecified retaliation. The shift marks a deterioration of sentiment on trade that picked up earlier this month amid signs of progress on a so-called phase one trade deal between China and the U.S.
“Markets have been guilty for around 20 months of underestimating the risks of a trade deal being done at all,” said Stephen Miller, an adviser in Sydney at GSFM, a unit of Canada’s CI Financial Group. “Whether it’s Treasuries or stocks or currencies, investors are now repositioning their bets in case we see political dysfunctions persist and reach a tipping point that spills over to trade.”
The rally in Treasuries dragged the benchmark 10-year yield down as much as 6 basis points to 1.726%, the lowest level since Nov. 1, while bond markets from Tokyo to Frankfurt also advanced. The yen and dollar led among Group-of-10 currencies and U.S. stock futures continued their slide from recent highs.
Hong Kong’s position as a global financial hub has already been shaken by months of protests and police responses that have grown increasingly violent, but its impact on many global markets has remained relatively muted. Along with issues such as the Iranian nuclear deal, North Korean weapons tests and the inquiries into U.S. President Donald Trump, Hong Kong is a subject that has tended to take a backseat for traders. But when those risks suddenly gain significance, it can send investors scurrying back to their preferred refuge assets.
The haven trade gathered pace after the U.S. Senate on Tuesday unanimously passed a bill aimed at supporting Hong Kong protesters, spurring China to repeat a threat to retaliate. It would be difficult for the U.S. to sign a deal if the demonstrations in Hong Kong are met with violence, U.S. Vice President Mike Pence said earlier this week.
Investors have been here before. The U.S. and China were said to be close to sealing a deal about six months ago, only for the U.S. to claim the Asian nation backed away from verbal commitments when the time came to sign the agreement.
“The market reaction could be much more negative if a repeat of May happens,” said Eugene Leow, a fixed-income strategist in DBS Bank in Singapore. Tensions in Hong Kong are also adding “another element of risk at a time when China-U.S. trade talks enter the crucial last stage,” he said.
Here are a range of market moves showing investors’ risk-off mood:
- The 10-year Treasury yield has fallen to a level more than 20 basis points below its peak from earlier this month, while its premium to the 2-year rate -- one of the most-watched curves -- compressed for a sixth day
- Japan’s 10-year benchmark dipped 2.6 basis points to negative 0.124%, while equivalent rates in Germany slid around 2 basis points to minus 0.363% and similar Australian yields declined to 1.07%
- South Korea’s won, often viewed as a proxy for global trade, slipped 0.1%, declining for a third straight day
- A JPMorgan gauge of demand for emerging-market currencies has fallen for a second week
- The VIX Index, a measure of expected volatility in U.S. stocks, has risen more than 6% this week
“The market mood is definitely shifting,” said Prashant Newnaha, senior strategist at TD Securities in Singapore. “There are a lot of questions on where this deal is sitting at the moment, and developments we’ve had in May are now putting some doubts on whether a deal can be signed at all.”
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