Biweekly International Market Observations (6/2/20)

We continue to offer important market observations in the world of international investing during this extraordinary time with the global pandemic and ongoing response to the coronavirus (COVID-19) outbreak. Below are some key points for the week ahead:

• The biggest topic for us over the past week has been China and their reneging of the “One Country, Two Systems” framework they signed with the British and Hong Kong back in the 1990’s. This treaty guaranteed the people of Hong Kong basic human rights including free speech through 2047. Over the past year, however, China has worked to suppress these freedoms and last week surprised many with the announcement of the implementation of a new law under the guise of “national security” that would essentially take away what little was left of the Hong Kong people’s freedom of speech. This led the U.S. Secretary of State to declare Hong Kong no longer an autonomous territory and President Trump announced the U.S would be stripping Hong Kong of its special trading status. This will have severe consequences for many companies around the world and will be a strain on U.S-China relations for decades to come.

• Signs of further strain to U.S.-China relations were abound last week as the U.S. administration took steps to rescind visa’s to some Chinese students due to security concerns. Additionally, the Senate approved new rules that would prohibit foreign companies from trading on U.S. exchanges without adhering to auditing rules from the official accounting oversight board – a move clearly aimed at Chinese firms. Less than two weeks later, Netease, a Chinese gaming company listed on the NASDAQ, did a $3 billion secondary offering on the Hong Kong exchange in a step to transition their primary listing permanently to Hong Kong. Taken together, these tensions will ultimately result in the dissolution of last year’s trade pact and, more importantly, lead to the return of rampant intellectual property theft from Western companies by Chinese actors – a behavior that has made investing in China extremely difficult.

• European PMIs are showing glimmers of hope this week with May’s reading coming in steadily higher than April. Although still well into contractionary territory, the result would suggest a bottom may be in for the Eurozone economy. Further supporting this position is last week’s announcement by the European Commission of a €750 billion recovery stimulus plan on top of a €1.1 trillion budget over the next seven years. This was a strong message of support and was well received by market participants.

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