The Day at a Glance | May 28 2020

China approves Hong Kong law; tensions escalate

The Chinese Parliament has passed a new national security law for Hong Kong amidst strong criticism and threats on behalf of the US. This is the first time that China has an impact on the autonomous city`s legal code without taking into consideration Hong Kong`s legislative body. This marks the beginning of a movement for Pekin`s greater control over the city through criminal penalties for acts of treason, sedition and subversion. The US has called on the United Nations Security Council to have an extraordinary meeting on the matter, but this has been blocked by China. The US had warned in recent days that it would sanction China for this action. Frictions between both countries could undermine Hong Kong`s privileged position as a global financial center and increases the threat of an escalation of political and trade tensions as well. Donald Trump has affirmed that he considers applying direct sanctions on Chinese government officials and companies – in which case China would respond, according to statements. US Congress on its part approved imposing sanctions on government officials yesterday for the abuse against Muslim minorities in Xinjiang; and the Department of State laid a report before Congress that assures that Hong Kong is no longer autonomous from China, which could lead to the elimination of trade and financial related preferential treatments on behalf of the US. Added to this is the fact that yesterday a Canadian court allowed Meng Wanzhou, Huawei`s CFO`s extradition to the US, arrested last year for fraud charges and violating Iran`s sanctions. China has said these accusations are deceptions made up by the US in order to attack the Chinese technology company. Amidst tensions, the Yuan has reached all-time lows and Hong Kong Stock Exchanges have receded. It`s feared that tensions will escalate from being political and trade confrontations to a financial one, which could devaluate the Yuan and lead to the end of Hong Kong as a global financial center and limit funding for Chinese companies in international markets.

US growth is revised slightly downwards

US growth figures were revised slightly downwards for the 1Q20, from (-) 4.8% to (-) 5% annualized. The downwards adjustment was due to more negative figures regarding investment (-10.5% vs -5.6% prev.). Consumption was revised upwards (from -7.6% to -6.8%) along with government spending (from 0.7% to 0.8%). These figures were published at the same time as initial jobless claims, which recorded a 2.12 million increase – a level that is still extraordinarily high and takes the total of initial jobless claims above 40 million since mid-March; even though continuing claims reduced from 25 million to 21 million on the week ending on May 15th, the first drop since the start of the pandemic. This last figure suggests a slight recovery in the labor market as the economy has gradually started to reopen in recent weeks. For John Williams, President of the Federal Reserve Bank of New York, the economic contraction could have reached its lowest point, but the agency will continue to carry out stimuli for a longer period of time. In fact, he assured that the FED is seriously considering implementing a program in order to control the yield curve regarding sovereign debt. The program would consider the unlimited purchasing of treasury bills (or sale) to maintain interest rates in the market at a fixed level. For Williams, this measure could complement the monetary policy`s low rates; even though they are still in the process of analyzing the effect this would have on other countries and the possible means of its implementation in the US. If this measure is carried out, it`s speculated that the FED would concentrate on controlling rates of 2-3 year instruments.

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