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FTSE 100 Drops on China Tensions, GBP/USD Breakdown - US Market Open

FTSE 100 Drops on China Tensions, GBP/USD Breakdown - US Market Open

2020-05-22 12:30:00
Justin McQueen, Analyst
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CNH, GBP Analysis & News

  • Hong Kong Stocks Suffer Worst Drop Since 2008
  • Risk Sentiment Heads South to Close Out the Week
  • Chinese Yuan (CNH) the Key Signal to US/China Tensions

Equities: Much of the early week optimism has come to a halt with equity markets looking to close out the backend of the week in the red. US-China tensions remain in focus, particularly after China announced that it will look to place national security legislation on Hong Kong. In turn, the Hang Seng had been the notable underperformer overnight, closing lower by 5.5%, marking its worst drop since 2008 amid fears of a return to HK protests. The Risk-off sentiment has spread to European markets with the Euro Stoxx 50 falling a modest 0.8%, the FTSE 100 is the session's laggard given its higher exposure to China/HK.

Currencies: The Chinese Yuan has been garnering attention as USD/CNH hits the March highs. A firm break above 7.16 may be the last straw that breaks the camels back for a sharper retracement in risk appetite. Alongside this, given the long weekend ahead with market holidays in both the US and UK, position squaring among market participants may see an extension of risk aversion. Elsewhere, another BoE rate setter showcased an open-minded stance to negative interest reaching the shores of the UK. In turn, the Pound is back below 1.2200. However, while negative rate chatter has been doing the rounds, this is unlikely to present a material risk in the short term, for now, the base case is for at least a £100bln increase in QE at the June meeting.

Commodities: Both WTI and Brent crude futures have conformed to the negative risk tone, however, investors will be eying the latest Baker Huges rig count for another drop in oil rigs. The precious metal complex sees gold prices pick up, albeit somewhat modest at best with gains of 0.5%.

Looking Ahead: US-China headline watch, particularly with the Senate looking to put a forward a bill that could see sanctions on China over Hong Kong.

Chart of the Day: Signal for US-China Tensions

FTSE 100 Drops on China Tensions, GBP/USD Breakdown - US Market OpenFTSE 100 Drops on China Tensions, GBP/USD Breakdown - US Market Open

Source: Refinitiv, DailyFX

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