Hong Kong bill complicates trade deal, we reduce risk
US congress unanimously passed the Hong Kong Democracy Bill on Tuesday, supporting Hong Kong protestors. President Trump is expected to sign off on it, risking ‘immediate’ retaliation by China. The Chinese yuan, a risk-on risk-off indicator, weakened in recent days. A statement issued by Hong Kong’s foreign ministry said, “Don’t say I didn’t warn you”, using a Chinese phrase that, prior to this year, has only used been in rare cases, like before China invaded India in 1962. This implies that the US and China will struggle to reach a phase-one trade deal, if they reach a deal at all. Given recent market developments, which have suggested a trade deal is in the making and lifted some uncertainty for export and manufacturing companies, we have reduced our weight in equities and remain cautious on high yield bonds. While a base case scenario of a marginal improvement in global growth and a return of positive earnings growth still applies, recent developments mean it could take longer for this scenario to materialize.
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