Volatility, Trade War, Relief,…and Murder all connected in this week’s market commentary.
The Major Markets all ended lower for the week, but the returns hid the instability that took place during the five trading sessions.
Volatility spiked again last week as headlines from China impacted global markets. China has been struggling to contain demonstrations in Hong Kong as its citizens continue to protest an extradition bill proposed by the mainland. This bill would allow suspects to be taken from one region of China to another to face punishment for their crimes. This issue is complicated due to the political status of both Hong Kong, which transfer back to China in 1997, and Taiwan, which operates autonomously.
The source of these protests has an unusual start from back in February 2018. It began when a teenage couple vacationed to Taiwan for Valentine’s Day. During this trip, the boyfriend murdered his girlfriend and then fled back to Hong Kong. The suspect admitted to the killing, but authorities could not extradite him back to Taiwan to face punishment, as there are currently no laws between the two regions to allow for this.
Authorities began to propose new legislation to resolve this problem, along with provisions for suspects to be sent to mainland China. However, some critics are concerned that these laws will be used to punish political opponents along with the other criminals. Because of how this proposed law could be abused, Hong Kong citizens have protested in large numbers, shutting down airports and attempting a run on the Hong Kong Banks.
This all while China has attempted to appear strong in a trade dispute with the United States. Consequently, some of the news out of Hong Kong has impacted market participants’ views on trade war solutions.
Markets opened the week substantially lower and traded even lower into the close Monday. The selling continued at Tuesday’s open, however not long into the session, the Trump Administration announced that the proposed additional tariffs on Chinese goods would be delayed until December 15th.
This news surprised the markets, sending the benchmark much higher for the day. Sadly, the gains were short lived. Some commentators viewed the tariff delay as a sign of the Trump administration’s weakening position in the Trade War.
Additionally, the yield curve came under pressure late Tuesday. The pressure on interest rates continued Wednesday as the 2s10s inverted for the first time since 2007. This inversion has proceeded a recession ever time since 1980. Furthermore, the 30-year traded at an all-time low and for the first time ever, the entire yield curve traded below 2% at the close.
After hours, President Trump tweeted a flattering message about President Xi and his handling of the Hong Kong protests in the spirit that another personal meeting would lead to more productive trade talks.
Finally, the markets rebounded on Friday on news that a call between the two leaders would be scheduled soon. And by the close of Friday, the weekly return seemed subdued compared to recent history.
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