Rising tensions in Hong Kong drive equities lower

• Asian stocks tumble on rising tensions in Hong Kong
• Investors continue to monitor trade talks
• Gold falls the most in two years

The closing of US equities at record highs on Friday did not seem to influence the market’s direction in Asia this morning. Hong Kong’s Hang Seng Index tumbled 2% in early trade while China’s Shanghai and Shenzhen Composites both fell more than 1%.

Escalating violence in Hong Kong is once again putting global investors on the defensive. The 12% rally in HSI since bottoming out in August was mainly driven by global risk-on sentiment. If the situation deteriorates further, it will not only drag local equities lower but the region as a whole. That’s the kind of reaction we’re seeing today on reports that two protesters were shot by police at a mass demonstration.

Unpredictability of trade talks

Global risk assets have been trending higher over the past five weeks on signs of progress towards a phase one trade agreement between the world’s two largest economies, which is supposed to put an end to the trade war. Hopes are still high that a deal will be struck in the upcoming days, but the content of this deal remains unclear.

Last week, we received conflicting messages from both sides. First, there was confusion about when and where the deal would be signed.  Later, a statement from China’s Ministry of Commerce spokesman stated that the US and China have agreed to proportionally roll back tariffs on each other’s goods. However, on Friday President Trump said he had not yet agreed to roll back any of the tariffs already imposed. These mixed messages reveal a clear division within the White House administration, but investors remain optimistic a deal will be struck. The key question now is how much of that deal is already priced in? At this stage the risk of disappointment is very high, especially if a trade deal does not include a significant rollback of previous tariffs.

Gold experienced worst week since 2017

With US equities rising to new highs, it shouldn’t be a big surprise that gold has been punished. The precious metal closed last week 3.6% lower, as US 10-year Treasury yields approached 2%. What’s more interesting in the bonds markets is that Treasury yield curve has steepened the most since June with 2-year/10-year spread reaching 26.7 basis points.

If this trend of rising bond yields and equity markets persist, gold will likely remain under pressure. That said, some long-term investors will see the dip in gold prices as an opportunity to accumulate positions.

US Week Ahead

Investors will continue monitoring US-China trade developments very closely this week, as any headlines coming through the wires will have an impact on asset prices.

On the data front, Friday’s US retail sales is the key economic piece of data to watch. In September, retail sales unexpectedly shrank 0.3% while it was expected to rise by the same amount. The US consumer contributes 70% to the country’s GDP and if there are any signs consumers are reluctant to spend, then it’s a big problem for the world’s largest economy. One data point is not enough to judge that spending behavior has changed, but two or three months of poor data will be problematic.