Will investors cool on Hong Kong as China takes closer control?

The most unsettling aspect of Friday’s 5.6 per cent plunge in Hong Kong’s Hang Seng index was not its scale or its suddenness but its implications for the coming days and weeks.

The drop — the heaviest fall in nearly five years — comes after China said earlier the same day that it planned to introduce a national security law that would target subversion, terrorism and foreign influence. The move, which has angered pro-democracy activists and legislators as well as the US, appears certain to threaten the “one country, two systems” tradition.

Not only has that model guaranteed Hong Kong’s autonomy, said analysts, but it has underpinned the growth of Asia’s pre-eminent financial centre.

The Hang Seng has been battered by a prolonged run of bad news, including democracy protests against Chinese rule, the damage wrought by the US-China trade war and, most recently, the coronavirus pandemic.

The question now is whether the Hang Seng’s dive on Friday was merely a shocked reaction or the start of a longer decline, triggered by a reappraisal of Hong Kong’s status as a financial gateway to China. Leo Lewis

Will QE and government spending drive up inflation?

A wave of stimulus measures has reawakened fears of a surge in inflation, as authorities try to boost economies hit hard by the coronavirus pandemic.

Some fund managers argue that a big surge in money printing by central banks, coupled with fiscal stimulus and pent-up demand from consumers, could lead to sustained rises in prices. Pressure on global supply chains as the US and Japan look to bring some businesses’ operations back from China could make things worse.

“I can’t see how we’re not going to get inflation,” said hedge fund manager Crispin Odey, founder of Odey Asset Management. “The economy has had three months off and they [authorities] have poured so much money in.”

Any significant pick-up in inflation — and thus interest rates — could be a headache for major economies, many of which are dependent on borrowing costs staying low to service huge debt burdens accumulated in recent years.

However, so far there have been few data points suggesting a serious rise in prices is around the corner. UK inflation, for instance, fell sharply last month. US five-year inflation swaps — a measure of investors’ expectations of price rises — have rebounded since mid-March but remain below the Federal Reserve’s target.

Sushil Wadhwani, a former member of the Bank of England’s Monetary Policy Committee and founder of hedge fund QMA Wadhwani, said he believes central banks will be able to respond to any emerging inflationary threats. His fund is more focused on the possibility that inflation may undershoot central banks’ targets.

“Given much lower commodity prices and huge downward flexibility in wages, the risks in the short-run must be that inflation ends up being too low rather than too high,” he said. Laurence Fletcher

Will stalled Brexit negotiations sink the pound?

Brexit is back, which means that sterling is headed for a wild ride as the UK and EU step up a war of words ahead of the fourth round of trade negotiations due to begin on June 1.

The pound is already the worst-performing major currency this month, weakening after the last round of talks stalled on May 15.

Since then, the possibility of negative interest rates has contributed to further losses against the dollar. Large banks have slashed their forecasts for the currency, with Bank of America analysts now seeing the pound trading at $1.16 in June, down from $1.22 on Friday.

Investors are concerned that time is running out for a possible extension to the transition talks beyond 2020. They also worry about a lack of agreement at a time when the economy is being hammered by coronavirus.

“With the end-June deadline for the extension of the transition period approaching . . . and the UK government so far being adamant not to extend, the downside risk to the pound is growing,” said Petr Krpata, a currency strategist at ING Bank.

Mr Krpata said that, without an extension, the euro could strengthen to above £0.90 by the end of June. On Friday it was trading at £0.89, from a low of £0.87 last month.

UK economic data has shown some improvement, but Chris Williamson, chief business economist at IHS Markit, which releases a key survey of business activity each month, said gross domestic product could fall by as much as 12 per cent this year.

“Virus-related restrictions, widespread job insecurity and weak demand will be exacerbated by growing business uncertainty regarding Brexit,” he said. Eva Szalay

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