Global Stocks Fall as China Flexes Muscles Over Hong Kong
By Anna Hirtenstein and Chong Koh Ping
Global stocks declined Friday, led by a steep drop in Hong Kong shares, as rising tensions between Washington and Beijing and the gloomy outlook for China's economy weighed on investors' sentiment.
The Hang Seng Index closed down 5.5% in its worst day since July 2015 after China moved to impose new national-security laws on the city.
Futures tied to the S&P 500 dropped almost 1%, suggesting that U.S. stocks may drop for a second day and erase most of the gains made so far this month. The pan-continental Stoxx Europe 600 retreated 1.5%.
China scrapped its economic growth target for 2020 in a stark acknowledgment of the challenges facing the world's second-largest economy, sending crude oil and metal prices sharply lower.
"Anything that knocks China's growth rate, whether it's a slower recovery from the coronavirus or a rise in tensions with the U.S., will weigh on global growth expectations," said Seema Shah, chief strategist at Principal Global Investors.
Beijing's decision to omit a formal target comes amid the sharpest contraction in four decades precipitated by a sudden halt in manufacturing activity because of the coronavirus pandemic. The nation's policy makers are signaling that they won't rush to introduce additional stimulus measures, which suggests more economic pain for countries that have become increasingly reliant on China as an engine of growth.
China's proposed national security law would challenge the financial hub's autonomy and threatens to increase tensions with the U.S. Congress condemned the move, with senators promising an urgent push on legislation that would impose sanctions on Chinese officials and institutions involved in undermining Hong Kong's Western-style rule of law.
"The market had gotten kind-of used to dealing with the coronavirus and terrible economic indicators, but potential disruption from a trade war is proving to be too much for sentiment," said David Madden, a market analyst at brokerage CMC Markets.
The dollar strengthened as investors moved into haven assets, with the ICE US Dollar Index rising almost 0.5%. The yield on the 10-year U.S. Treasury bond fell to 0.641%, from 0.677% Thursday. Gold rose 1.1% to $1,740 an ounce.
Oil and industrial metals dropped on concerns over China's growth. Brent crude, the global oil benchmark, fell 4.8% to $34.32 a barrel. The gauge for U.S. crude fell 5.8%. Copper, a closely watched metal for its use in industrial activity, slipped almost 2%.
"China is today the biggest importer of crude oil, so Chinese growth is hugely important for oil demand," said Bjarne Schieldrop, chief commodities analyst at Nordic bank SEB. "But at the same time, demand is ticking up and supply is ticking down," as Asian countries reopen, he said.
In the U.K., the yield on 10-year government bonds fell to 0.137%, the lowest since the height of the market turmoil in March, from 0.175% on Thursday. The U.K. reported a record fall of 18.1% in retail sales in April due to the nationwide lockdown. The FTSE 100 equity benchmark slid 1.3%, while the British pound edged down 0.3%.
"This period should reflect the worst monthly year-over-year decline, as the U.K. has begun the gradual process of reducing restrictions on retailers," said Benji Dawes, a fund manager at Premier Miton. The success of reopened shops in the coming months is far from guaranteed, he said.
In Asia, most major stock benchmarks ended the day lower. China's Shanghai Composite Index fell 1.9% while South Korea's Kospi Index retreated 1.4%.
"Any attempts by China to become more assertive will cause some flashpoints locally," said Jim McCafferty, joint head of Asia-Pacific equity research at Nomura in Hong Kong. That could help stoke broader geopolitical tension, he said.
Markets are caught between poor economic data and U.S.-China tensions on one side, and governments' economic-support measures on the other, according to Ankit Khandelwal, chief investment officer at Maitri Asset Management.
"The tension between the U.S. and China might dictate the near-term movements of the markets," Mr. Khandelwal said.
Chinese Premier Li Keqiang detailed bond programs totaling 4.75 trillion yuan ($667 billion) to help fund China's recovery from the coronavirus. The proceeds will be channeled to local governments to help boost employment, consumption and investment.
"This is very different from in the past," when Chinese stimulus didn't go directly into local governments' coffers, said Chaoping Zhu, a Shanghai-based global market strategist at J.P. Morgan Asset Management. However, the measures have disappointed some Chinese investors, since it meant less capital would flow into shares and property, he said.
"The government is not in a hurry to have a new round of very aggressive stimulus measures. Pumping in a lot of money will cause property prices to rise sharply again," Mr. Zhu said.
Write to Anna Hirtenstein at email@example.com and Chong Koh Ping at firstname.lastname@example.org