CROUCHING TIGER
Have HSBC and Standard Chartered “chosen profits over human rights” in backing China’s national security law for Hong Kong, as some suggest? Or does it reflect the tightrope businesses must navigate between Hong Kong’s protesters and Beijing?
U.S. special treatment for Hong Kong is now in doubt as is the city’s role as a finance hub. Its position as a major goods trading centre will be threatened if wares become subject to the higher import tariffs paid in mainland China or if U.S. imports no longer enjoy zero rates.
One silver lining may be more IPOs by Chinese firms ditching their New York listings or mainland newcomers debuting in Hong Kong rather than on Nasdaq.
But as Beijing tightens its grip, an American Chamber of Commerce survey showed 30% of respondents were considering moving capital, assets or business operations. Heed Western warnings or stick with Beijing? It’s a choice more companies will have to make.
STOCK RALLY, YIELDS UP
The U.S. Fed might be watching the steepening Treasury yield curve with trepidation. The steepening — when longer-dated yields rise faster than short-tenor ones — signals a brighter growth outlook. But too fast a rise in borrowing costs can strangle economic recovery.
After the June 9-10 FOMC meeting, investors will listen for the Fed’s views on the economic outlook; an upbeat tone could further feed the stocks rally and trigger Treasury selling.
That may train more attention on the curve; the 5-year/30-year segment is at the steepest since end-2017, rising around 30 bps in the past month. Few expect Fed action this month but it may well signal additional bond-buying or yield curve control measures ahead.
TIME FOR EURO BULLS
If nine straight days of gains for the euro and the tightest Italy/Germany bond spreads in over two months are anything to go by, investors are a whole lot more confident in the Eurozone outlook compared with a few weeks ago.
After an initial slow and divided response by politicians and an unfortunate comment on bond spreads from the ECB chief, European authorities suddenly found their feet — a recovery fund with some form of fiscal burden sharing is taking shape, Germany has agreed more fiscal spending and the ECB has added 600 billion euros to its emergency stimulus.
Further euro gains and tighter bond spreads appear likely, as does a selloff in German bonds as demand for safe havens wanes. The road ahead is long, no doubt. Yet for the first time in years, euro bulls have reason to hope.
THE RECKONING
Who’s buying? That’s the question being asked of China’s factories whose output is back to levels seen before the coronavirus crisis shunted or shut down most of the global manufacturing supply chain.
Sunday’s trade data should confirm that global demand for stuff being cranked out by the world’s biggest factory remains weak. But any rise in imports, if driven by cheaper oil or raw material purchases, would feed fears of an inventory build-up and worries that manufacturers have been politically pressured to produce.
The coming days might be when investors begin suspecting China will not have any growth this year. That will lead them to gauge how bullish stock markets will react as the unstoppable force of Chinese production runs into an impregnable global downturn.
DRY POWDER
By denting boardroom confidence and ravaging balance sheets, the coronavirus crisis brought a multi-year deal-making boom to a halt; Global M&A activity has plunged 43% this year while global private equity buyouts are down 27%, Refinitiv data shows.
But European M&A activity is bucking the trend with a 12% rise, thanks to some mega-deals such as a 24 billion-pound merger of mobile operators O2 and Virgin Media.
True, the number of announced transactions is 33% below year-ago levels, but bankers see this changing as private equity funds sniff around for troubled businesses in need of cash injections or for resilient listed firms.
A consortium of KKR, Cinven and Providence has just launched a 2.96 billion-euro bid for Spanish telecoms operator MasMovil — Europe’s first take-private attempt since the crisis struck. CVC Capital Partners is in talks with Italy’s Serie A to invest up to 2.2 billion euros into the soccer league’s broadcasting rights business, sources say.
Expect more deals if market confidence continues to build.
