Global stocks and crude oil slowed advances made this week as fears over renewed tensions between Washington and Beijing outweighed hopes of more stimulus packages to support the world’s largest economies.
Investors sought out havens such as gold and US Treasuries after China moved to assert its authority over Hong Kong with plans to impose a national security law on the territory.
The Communist party’s decision earned a sharp rebuke from Washington, where Mike Pompeo, US secretary of state, called the plans a “death knell” for autonomy in the financial hub.
Hong Kong’s Hang Seng index closed down 5.6 per cent, marking the benchmark’s worst one-day performance in almost five years.
In the US the benchmark S&P 500 index finished 0.2 per cent higher, lacking direction. Brent crude, the international benchmark, fell as much as 5.2 per cent but later halved its losses.
The concerns over China-US relations checked some of the positive momentum generated this week as the world’s biggest central banks indicated they had further ammunition to support spending plans in the wake of the coronavirus. Investors’ hopes of a recovery were also stirred by more countries beginning to ease their lockdown restrictions.
The S&P 500 rose 3.4 per cent over the week, leading other global benchmarks higher. In Europe, France and Germany indicated they had reached an accord on a recovery fund for the EU while the UK’s central bank said it was exploring negative interest rates.
Friction between Washington and Beijing has been rising steadily as Donald Trump, US president, blames China for the global spread of the coronavirus. Earlier this week Mr Trump claimed China was behind a disinformation and propaganda attack on the US and Europe.
Jonas Golterman, an economist at Capital Economics in London, said an escalation of tensions in Hong Kong risked undermining a rebound in equity markets.
“It appears to serve leaders on both sides to distract attention from the pandemic and the resulting economic hardship,” he said. “Unless either side takes concrete steps to escalate the conflict further, which would probably hurt their own economies, the impact on markets is likely to remain limited.”
European stocks were mixed on Friday, with London’s FTSE 100 down 0.4 per cent and the regional Stoxx Europe 600 index flat. Stocks exposed to Asia were hit hard, with the insurer Prudential losing 9.2 per cent and banking group HSBC down 4.9 per cent.
Traders in Hong Kong said they had been blindsided by China’s move and said the local equity market could fall further if it reignited the territory’s pro-democracy movement over the weekend.
Mainland China’s CSI 300 index of Shanghai and Shenzhen-listed stocks fell 2.3 per cent as the National People’s Congress, China’s rubber-stamp parliament, declined to set a gross domestic product target for the first time. The country faces its most severe economic downturn since the 1970s owing to the impact of coronavirus.
“The focus [will] be on policy easing and stimulus for recovery after the Covid-19 pandemic,” said Bruce Pang, head of macro strategy research at China Renaissance. “Stabilising employment will remain Beijing’s top priority, considering it will help to anchor business and consumer expectations, and expenditure.”
Tai Hui, Asia-Pacific markets strategist at JPMorgan Asset Management, said dropping the economic growth target was “realistic”.
“There are just too many variables. You’ve got the outbreak, [and] you’ve got the escalation in US-China trade tensions,” he said.
The ratcheting up of geopolitical tension helped to lift haven assets such as gold, the dollar and core government bonds.
The dollar index, a broad measure of the greenback against a basket of global peers, rose to its highest level of the week, while gold climbed 0.5 per cent to $1,733 an ounce, near a seven-year high.
Government bonds rallied, with the yield on the 10-year US Treasury note falling 0.015 percentage points to 0.623 per cent. The market closed early on Friday ahead of a holiday weekend.
The yield on the five-year UK gilt remained in negative territory, having crossed below zero for the first time on Thursday on rising expectations for further easing in monetary policy from the Bank of England.
Additional reporting by Don Weinland in Beijing