Hong Kong market risks and trade tensions

Yuan weakness and the lack of a trade deal

Following the May episode, we have once again seen US-China trade tensions escalating and this time with both sides adding teeth to their threats, implicating Asia markets. Kickstarted by the US administration, President Donald Trump had brandished fresh tariffs of 10% on $300 billion worth of Chinese imports for September 1 into August.

While the provocation had been a surprise following the G20 trade truce between Presidents Donald Trump and Xi Jinping, it had been China’s response that perhaps spoke volume of the lack of common grounds between the two sides. USD/CNY was seen guided past the highly watched $7.0 psychological level for the first time in over a decade with the authorities’ daily yuan fixing - the mechanism through which the People’s Bank of China (PBOC) manages the yuan fluctuations. Likewise, with the offshore yuan, USD/CNH had also shot through the roof. The sharp widening of the spread between the offshore and onshore yuan meanwhile also shouts of the lack of conviction within the market for a resolution on this key driver for markets, with the offshore yuan being more market driven. While expected policy support had widely been cited as a redeeming factor, the risk for Asia markets persists in the short-term until a stronger dose may be sighted.

One good piece of news cheered in part by the market had been the successive yuan fixing at a rate better than what the market was fearing for. That said, the trend remains unmistakably going in the direction of a weaker yuan, which perhaps will not be one aiding the recovery of US-China trade relations in the near-term.

Source: IG Charts

Trade the Hong Kong market with caution

Notably, with the aggravation of trade tensions had also been the paring back of growth outlook across US banks such as Goldman Sachs and Bank of America. This had taken a significant toll on markets into mid-August.

One market experiencing an added layer of gloom had been the Hong Kong market amid the domestic unrest triggered by the extradition legislation. With protests cascading over two months thus far and partly spilling into the work week, the Hong Kong market grappling with this hit on sentiment had altogether slipped into year-to-date decline. Economic data had likewise reflected this impact with July’s retail sales unexpectedly falling further into contraction territory at -6.7% year-on-year (YoY) for this tourism dependent region. Alongside the impact on trade, it may be some time before we see the light at the end of the tunnel for the HSI.

As such, one of the questions constantly posed as to whether the Hong Kong market is ripe for bargain hunting may yield a negative response. As far as the deepening of the US yield curve inversion is suggesting, equity markets across the US to Asia may have more to spiral in the near-term even if the potential for recession remains uncertain at present. Monetary policy support, particularly from the Federal Reserve may be delayed at least until the September meeting, leaving a vacuum for markets in the duration. And for a market wholly pricing in a 25 basis points cut, a lack of which could mean further disappointment in-store. Thus, while the market direction sits in the fate of an amalgamation of uncertain factors, it is volatility that may be expected with greater certainty.

Despite swivelling in oversold territory, the HSI downtrend sustains. A strong break of the support around the 25,430 region will put the October 2018 lows to watch prior to the 24,000 level. Given the evolving situation of both the abovementioned US-China trade relations and Hong Kong’s domestic issue, sharp reversals should not be ruled out with stops and guaranteed stops tools that could aid with risk management in the trend trade here.

Source: IG Charts