Hong Kong - The Despiriting Spectacle

Jul 07, 2020

After a long weekend, we wake up with new developments in the markets and in politics.

While it was always expected, the Chinese authorities brought forward the end of the “one country, two systems” rule that existed in HK by 27 years. Many factors could have forced China to hasten their action. When Britain handed over HK to China in 1997, it accounted for around 20% of the Chinese economy compared to 4% now. So, they are not that affected by international outcries. China thinks that this is all a storm in a teacup.

Help us grow 🌱

If you enjoy Breezy Briefings, there are three things you can do to help us grow and reach more people. Which would be lovely!

Share it with someone else. Forward the email. Post on social.
Click/tap the little ❤️ icon at the top or bottom. It actually helps.
Subscribe for free.

China feels more confident about tapping the international capital markets through other means. HK now is not even in the list of the top 10 of China’s largest cities. Though China’s high handedness may cost HK economy at least 5% economic contraction, China feels that they can ride this out. 7 out of the 10 biggest stocks in the Hang Seng Index are from the mainland. So far there has been no fall out. Ever since the law was passed the HK Dollar has risen and the stock markets have held their ground.

But, as Ian Bremmer of Eurasia group said, “If you’re an international business that needs rule of law and an independent judiciary to protect your company and workers, leaving HK is not a question of whether, but when”.

More than 1500 international companies may be having second thoughts about relocating. Singapore or even Dubai could become major beneficiaries of corporate restructuring and expatriate relocation that will ensue.

Another reason that must have prompted China's swift action is the long-drawn protests in HK last year - nearly two million people on the streets of HK. China thought that this was sending a wrong message to regions of Tibet and to the Muslim Uighur region of Xinjiang where there has been protests towards Chinese policies.

While this has created mixed reactions from around the world towards China and the added skirmishes with India, the US- China relations will be a major theme for the upcoming US presidential election.

The two things Democrats and Republicans agree are that the Fed will continue to follow an unlimited policy of printing money and will maintain an hard policy on China. So, they will be major talking points before the elections. Meanwhile, voices are getting louder from many major countries to nix ties with Huawei.

Equities

Markets opened yesterday with a major upside gap, supported by an advance/decline ratio on the NYSE with 13.5:1. Towards the end of the end of the day the A/D ratio dropped to 2.2: 1. Tesla had a stellar day and it looks like it is in competition to catch up with Elon Musk’s other project SpaceX. So far, the subdivisions in price actions in the S&P 500 are all pointing that the up move is corrective. Most of yesterday’s rally occurred in big cap and high-profile names.

Bonds

There are no much changes to the bond structure. Will wait for more price action.

Euro

Only a move below 1.1170 will get us excited about the expected down move in Euro. Meanwhile bullish sentiment on Euro is at extreme levels.

Gold

Gold must have seen a top at 1790 on Jul 1 but price action since then has not been very encouraging. Bullish sentiment is at an extreme. We will continue to watch for more confirmation.

Breezy Briefings