By Paulina Duran
SYDNEY (Reuters) – Hong Kong shares extended losses and a gauge of Asian stocks was largely subdued on Monday, after China’s move to impose a new security law on Hong Kong heightened concerns about the future stability of the city and global trade prospects.
Hong Kong’s HSI index <.HSI> fell 0.4% after sinking 5.5% on Friday, when Beijing proposed the new security legislation that sparked protests across the island over the weekend.
The broader MSCI’s index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> was 0.3% higher on thin volume, with South Korea <.KS11>, Australia <.AXJO> and New Zealand <.NZ50> all trading higher.
E-minis for S&P500 were 0.5% firmer, while the dollar edged up helped by rising risk aversion.
“News flow has been pretty negative, particularly out of Beijing and Washington, but we might be seeing some inter-regional switching into those markets that are less likely to be affected by the dispute,” said Michael McCarthy, chief market strategist at CMC Markets.
“Having said that, with Singapore, the UK and the U.S. all on holiday, trading is thinner.”
Japan’s Nikkei <.N225> jumped 1.7% after the Nikkei newspaper reported the country was considering a fresh stimulus package worth more than $929 billion that will consist mostly of financial aid programmes for companies hit by the coronavirus pandemic.
“Rising tensions between the U.S. and China around Hong Kong, trade policy and who is responsible for the 2020 economic dislocation is threatening to end the post March-trough rally,” said Perpetual analyst Matthew Sherwood.
Global equity markets have surged around 30% since hitting a low in early March, driven largely by policy stimulus.
“There is a plethora of headwinds brewing to have investors question their expectations including earnings downgrades, balance sheet develeraging, the absence of a (COVID-19) vaccine and rising geopolitical tensions.”
Global financial markets were already struggling to deal with mammoth economic uncertainty emanating from COVID-19 lockdowns with central banks slashing interest rates and pumping in huge sums of money into banking systems.
Governments across countries have also announced heavy spending to support economic growth. But optimism around economic re-openings and stimulus is fading.
Investors were rattled on Friday when Beijing unveiled details of the security legislation that critics see as a turning point for the former British colony.
The proposal drew the ire of Hong Kong residents who defied social distancing rules and protested on streets while the United States warned China’s move could lead to U.S. sanctions.
The U.S. Commerce Department responded by adding 33 Chinese companies and other institutions to a blacklist for human rights violations and to address U.S. national security concerns.
Sino-U.S. ties have nosedived since the coronavirus outbreak, with the administrations of President Donald Trump and President Xi Jinping trading barbs over the pandemic, including accusations of cover-ups and lack of transparency.
The two superpowers have also clashed over Hong Kong, human rights, trade and U.S. support for Chinese-claimed Taiwan.
Later on Monday, investor attention will shift to Germany, where the May IFO survey is expected to show some improvement off a record-low base.
Action in currencies was subdued.
The U.S. dollar was a shade higher on the yen at 107.65. The euro held near a one-week trough at $1.0891. Sterling added 0.1% to $1.2180 while the Australian dollar was slightly lower at $0.6532 after losses on Thursday and Friday.
Meanwhile, financial investors betting on a rebound in oil helped lift prices with U.S. crude rising 27 cents, or 0.81%, to $33.52 a barrel. Brent was 12 cents, or 0.34% higher, at 35.25.
Spot gold was off 0.4% at $1,727.2 an ounce.
(Additiona reporting by Swati Pandey; Editing by Christopher Cushing and Jacqueline Wong)