Why This Week Matters to You: Trade Risk Re-Emerge as Hong Kong Holds Referendum On Carrie Lam


Hong Kong Humans Rights and Democracy Act

As protests continue in Hong Kong, the US Senate is attempting to act. On Thursday, Nancy Pelosi signed the Hong Kong Human Rights and Democracy Act, as well as another bill that would “block American exports of non-lethal crowd control products to the Hong Kong police force”, per CNN. The Hong Kong Human Rights and Democracy Act would likely strip Hong Kong of its preferential trade status if China doesn’t maintain freedoms given to Hong Kong when Beijing took over more than two decades ago, per NPR.

On the face, it’s a helpful bill that supports the protestors in Hong Kong. If you dig deeper, it has serious implications for Hong Kong and US-China relations. The bill sends a strong signal to China that the US is standing with protestors in Hong Kong and their pro-democracy movement, which could be offensive to mainland China. The bill will now go to President Trump, putting him in a precarious situation as he’s balancing the spirit of the pro-democracy movement in one hand and the need to push through a US-China trade deal in the other.

Responding to the bill, the President tried to play both sides. “We have to stand with Hong Kong, but I’m also standing with President Xi,” the President said in an interview on Fox and Friends on Friday.

Trump faces a tough decision when the bill hits his desk. If he vetoes the bill, it could signal to President Xi Jinping and the Chinese delegation that the US needs a trade deal more than China, giving them the upper hand in negotiations. If he passes the bill, it could upset the Chinese and make trade talks even harder than they already have been.

A trade deal that seemed much more likely a few weeks ago has again become more complicated to complete.

Over the weekend in Hong Kong, local elections led to a record turnout for voters. 2.9 million people voted a turnout of more than 71%, per BBC. Their previous highest turnout was 1.47 million. After months of protest, the election yielded positive results for the Hong Kong opposition “pro-democracy” party. They took 177 of the first 211 seats declared, per SCMP. The Pro-Establishment, or Pro-Beijing, the party only took 25 of those seats. According to the BBC, 4.1 million people had registered to vote, in the country with a population of only 7.4 million.

The protests have turned into real results at the ballot box in Hong Kong, which has the potential to spark real change in the country.

Risk-Off Trade Back On

Treasury yields have been slipping and investors are again moving away from cyclical sectors such as energy and consumer discretionary. Investors are likely showing fear that a once-likely “Phase 1” trade deal isn’t as certain as it once seemed.

This chart from Bloomberg shows the spread between the two- and 10-year Treasury has been slipping recently, a contrast from the rise it’s been on since late August. This indicates that investors are buying safer government bonds, causing yields to go lower.

The above graph also shows the returns of the sectors within the S&P 500 index over the past two weeks. Over the past two weeks, health care has been leading while cyclical sectors like consumer discretionary and energy have been lagging the index.

This could be an indication from the bond and equity markets that moving into safer investments could be the right move in the short-term while details are worked out between Shanghai and Washington over the Phase 1 deal.

According to Bloomberg, the 10-year yield is down to just over 1.75% after reaching its three-month high of 1.97% in early November. Gemma Wright-Casparius, a portfolio manager with Vanguard Group, believes to get a “push significantly higher it would have to be a resurgence in growth accompanied by a pop in inflation and weakness in the dollar.” It seems like the US Treasury yield could continue to keep its current range even if we do get a trade deal between the US-China. It will be interesting to see how equity markets react to the developments, but the consensus view is that markets will react positively.

It’s likely the market will become more sensitive to trade developments as we go later into the year. The Trump administration has a mid-December deadline for more tariffs if a deal doesn’t get done. If more tariffs go into place, that would likely spell trouble in equities and cause the Treasury spread to continue the decline that it has been on over recent days.

Week Ahead:

As usual, we will continue to monitor news on the trade front, something that becomes more important due to the aforementioned tariff deadline. We’ve mentioned in earlier articles how the consumer has carried the economy in this expansion and we will get more economic data over the next week to see if the consumer can maintain.


  • Consumer Confidence for October (Headline estimate: 127.5, per Bloomberg)


  • Personal Income for October (expected 0.3% increase, per Bloomberg)
  • Personal Spending for October (expected 0.3% increase, per Bloomberg)

Bloomberg Economics projected for real consumer spending to increase by 2.4% for the current quarter. The consumer has been so vital to the current expansion that if that were to fall short of that target, there would be downside risk to their GDP forecast of 1.7%. That makes these numbers extremely important.

-Jesse Wilkins


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