Picture: 123RF/BLUE BAY
Picture: 123RF/BLUE BAY

London — A four-day rally that had lifted world stocks to near-record highs stalled on Thursday as a US bill backing Hong Kong’s protesters became law, provoking China’s ire and threatening to derail an interim trade deal between Washington and Beijing.

Fading hopes of a rapprochement between the world’s two biggest economies before additional, potentially damaging tariff hikes kick in, also helped safe-haven assets such as US and German bonds, and lifted the yen from six-month lows.

The US legislation, which threatens sanctions for human rights violations and seeks to safeguard Hong Kong’s autonomy, prompted China to warn of “firm counter measures”.

“The risk-off moves clearly reflect a concern that this could be an impediment to the phase-one trade deal, which is now widely expected,” said Adam Cole, a strategist at RBC Capital Markets.

Wall Street’s main indices closed at record levels for a third straight day on Wednesday, albeit in thin liquidity before the Thanksgiving holiday, after data showed US economic growth had picked up in the third quarter and consumer spending had increased.

Elsewhere, though, the outlook for growth looks less rosy. Japanese retail figures slumped the most since 2015 as a sales tax hike dragged on the economy, exacerbating a slowdown caused by slowing exports and manufacturing. That took Asian shares excluding Japan down 0.2%. Japan’s Nikkei, Hong Kong’s Hang Seng and Shanghai blue chips all closed weaker.

A pan-European index opened 0.2% lower, led by trade-sensitive sectors such as automotive and tech.

That kept MSCI’s world equity index flat, after it approached the record reached in January 2018. However, the index is up almost 3% so far in November and is on track for the best month since June as investors flit in and out depending on the trade news.

“People don’t want to be caught on the wrong side,” said Geoff Yu, head of the UK investment office at UBS Wealth Management. “It does reflect there’s cash on the sidelines. If you can stretch the positive narrative, if the trade issue is out of the way for the time being, we might actually see demand pick up.”

US markets are closed for Thanksgiving on Thursday, but equity futures for all three major indices were down about 0.3%.

Hong Kong and Brexit jitters

Jitters over a renewed China-US fracas also showed up in currency and bond markets. US bond markets are closed, but German yields fell to their lowest in nearly a month, down 1.5 basis points on the day

The yen, a currency investors flock to in times of trouble, gained 2% against the dollar, rising as high as ¥109.40 to the dollar. The Australian dollar and the offshore Chinese yuan lost about 0.2%.

The pound rose on Wednesday after a model for pollsters YouGov, which accurately predicted the 2017 election, said Prime Minister Boris Johnson is on course to win a majority in parliament at the December 12 election.

However, the currency failed to build on its gains, trading around $1.294. It was flat against the euro after surging to its highest in nearly seven months at 85p.

Implementing Brexit by the end of January, as Johnson had promised, will leave him a “minuscule” 11 months to agree a trade deal with the EU, analysts at Société Générale told clients.