Hong Kong Protests Lengthen List of Worries for Stock Traders

(Bloomberg) -- Hong Kong stock traders have a lot to contend with right now. A trade war between China and the U.S., a slumping yuan, spiking interbank rates and now street protests that spilled across the city’s financial district in a repeat of 2014’s Occupy movement.

The last two -- rates and protests -- have combined to snuff out a nascent recovery in the benchmark Hang Seng Index after last month’s 9.4% drubbing. The gauge tumbled as much as 2% on Wednesday after the one-month interbank borrowing cost surged to a decade-high and protesters demanded the city’s government drop a planned bill that would allow extradition to mainland China.

The index fell below the 27,000 level briefly on Thursday. It trimmed the decline to less than 0.1% from as much as 1.8% after the government postponed for a second day a meeting to discuss the bill and the one-month interbank borrowing cost extended its advance.

Hong Kong Protests Lengthen List of Worries for Stock Traders

There is little visibility right now on how these issues may be resolved. Few expect progress on trade negotiations before the Group of 20 meeting at the end of the month, while analysts increasingly think China will allow the yuan to weaken past a level it’s not breached since the global financial crisis. That’s bad news for Chinese companies listed in Hong Kong, whose earnings are generated in yuan.

"The market worries that the social unrest in Hong Kong may lead to an outflow of funds," said Alvin Cheung, an associate director at Prudential Brokerage Ltd. "There’s a good chance the Hang Seng Index will continue to decline. The progress of the extradition bill and the meeting between Trump and Xi at the G-20 will be the two key factors influencing the market trend."

Surging Hong Kong interbank rates, which are likely rising due to quarter-end demand for cash, may stay elevated until next month. That will weigh on the city’s equities as well as the dominant property developers.

Hong Kong Protests Lengthen List of Worries for Stock Traders

The outcome, and impact, of the protests are harder to predict. As of Thursday morning, things had calmed down after police used tear gas and rubber bullets to clear streets. But with little sign that either side will back down on the extradition bill, more protests are likely.

In 2003 and 2012, demonstrators succeeded in forcing the local government to climb down on unpopular bills related to national security and patriotic education. Massive protests in 2014 aimed at achieving greater democracy for the former British colony fizzled out in failure after more than 70 days of sit-ins. Those protests, which caused widespread traffic disruption, helped damp stock market sentiment -- the Hang Seng Index fell about 2% during the period.

The Hang Seng China Enterprises Index of Chinese stocks listed in the city also pared a drop, closing down 0.2% after retreating as much as 1.7%.

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