Hong Kong as a black swan and its consequences, FOMC protocol

21 nov 2019

The other day we wrote about the calm prevailing in the financial markets and the absence of “black swans”, which can turn the situation upside down and provoke a sharp surge of volatility.

Judging by how events are developing, Hong Kong could become such a “game-changer”. And the point here is not even the intensification of protest activity in the country and its transition to the bloody phase of the confrontation, but the reaction of the world to these events. In particular, the US Senate passed a bill in support of demonstrators in Hong Kong.

Since the events in Hong Kong are extremely important for China, they view such US actions as extremely hostile and painful. In particular, China said it would retaliate.

All this happens on the eve of the final rounds of the first phase of negotiations between the US and China, the positive outcome of which is already included in current market prices. So the aggravation of the situation may well provoke a breakdown in the negotiation process, and we will return to the situation when countries actively exchange new tariffs, that is, to intensify trade wars.

Although this scenario is relatively unlikely, you should not write it off. Moreover, investors are already trying to discount under a possible negative, and the press is beginning to "disperse" this topic. Accordingly, our recommendations for buying safe-haven assets continue to be relevant.

In general, in which we note that a critical mass of reasons to start a full-fledged financial crisis has already been formed and the whole issue is in the trigger. The conflict between the two largest economies in the world - what could be the best candidate for the role of a catalyst?

The United States yesterday reported good statistics on the real estate market (building permits grew in October by 5% with a forecast of a decline of 0.4%), but the ongoing hearing about the impeachment of Trump does not give traders a reason to concentrate on buying the dollar. FOMC protocols have given little to the markets in terms of understanding the Fed’s future moves. A pause is a current vector in betting policy.

Our position on the dollar remains unchanged: we are looking for points for its sales. Moreover, every day such opportunities appear in one or the other pair. For example, a pair of USDCAD was a good substitute.