Global stock markets fell and safe havens such as bonds and the Japanese yen gained on Friday, as investors awaited Washington's response to China tightening control over the city of Hong Kong.
China's parliament on Thursday pressed ahead with national security legislation for the city, raising fears over the future of its freedoms and its function as a finance hub.
US President Donald Trump said he would hold a news conference on China later on Friday. Trepidation about a further deterioration in Sino-US relations put investors on edge.
European stocks opened lower, with the pan-European STOXX 600 index down 0.86 per cent. Germany's DAX fell 1.2 per cent, Britain's FTSE 100 by 7 per cent and France's CAC 40 by 1 per cent. Futures for the S&P 500 slipped 0.4 per cent.
Earlier in Asia, MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.2 per cent. Japan's Nikkei retreated from a three-month high and the yen rose to a two-week high of 107.06 against the dollar. Bonds rose.
“The question is how far Trump will go at today's press conference, as removing Hong Kong's favoured status would probably spark negative market developments, hitting global risk sentiment, which could backfire on the US economy as it would further deteriorate the relationship with China,” said strategists at Danske Bank in a note to clients.
Trump offered a muted response to Hong Kong's mass democracy protests last year, while pursuing a trade deal with China. But ties with Beijing have since soured considerably through the Covid-19 pandemic.
Hong Kong's government warned on Friday that withdrawing its special US status, which has underpinned it as a finance hub, could be a “double-edged sword” and urged the US to stop interfering in its internal affairs.
The Chinese yuan weakened in offshore trade.
Hong Kong's Hang Seng index was 0.8 per cent lower and has lost about 3 per cent in the two weeks since news of China's security legislation broke.
In bond markets, yields on benchmark 10-year US Treasuries fell to 0.6656 per cent, more than 100 basis points below where they began 2020.
MAY MARCHES ON
Despite the gathering tension and the near-daily release of grim economic data, enormous global stimulus seems to have propped up stocks. The S&P 500 is up 4 per cent for the month and on track for its best May since 2009.
A rally in the risk-sensitive Aussie dollar is slowing, but the currency has gained nearly 2 per cent for the month and sits 20 per cent above March lows.
MSCI's All Country World Index, which tracks stocks across 49 countries, is on track for a 3.5 per cent gain this week - its best weekly performance since April.
The optimism stems from signs of progress in the world economy. The number of Americans seeking jobless benefits fell for an eighth straight week last week and New York has outlined plans for re-opening.
“As we have said about the re-opening and ensuing recovery, this is a process,” said RBC Capital Markets' chief US economist, Tom Porcelli. “And right now the process is moving along in the right direction.”
The euro was headed for its best month since December as the European Union's 750 billion-euro coronavirus recovery fund fuelled optimism about the EU's political future. It hit a two-month high of $1.1114 and last traded at $1.1106.
The dollar sank against a basket of currencies, down 0.2 per cent.
Gold was up 0.1 per cent at $1,720.27 an ounce. Brent crude slipped 1.5 per cent to $34.76 a barrel. US crude fell 2.2 per cent to $32.99 a barrel.
Both contracts are headed for their biggest monthly gains in years as production cuts and optimism about demand recovery led by China supported prices.
London aluminium prices, which stayed flat on Friday, were set for their strongest monthly gain since January 2019, underpinned by a solid recovery in demand from top consumer China.