Hong Kong Protests Are a Big Risk to Markets

Major Moves 

Protests in Hong Kong over proposed legislation allowing the extradition of citizens to China have turned violent with police firing rubber bullets, water cannons, and tear gas at protesters blocking access to government and financial buildings.

Besides the obvious risks to human life and safety, the protest and police reaction has had a financial impact on the Hong Kong markets as well. As you can see in the following chart, the Hang Seng Index, which reflects the value of more than half of the value of stocks listed on the Hong Kong exchange, is down nearly 2% for the day, while the Hong Kong dollar has rallied significantly. It may not seem like this should have a big impact on the markets, but it could turn into a much larger issue for traders. It's especially worrying because the index includes stocks with focused exposure to Hong Kong and China itself.

Hong Kong is a semi-autonomous region under the People's Republic of China with its own currency, laws, and culture. Hong Kong is especially important as a major center for global finance. If civil unrest in Hong Kong lasts very long, the impact would ripple through other financial centers because liquidity and access would be reduced.

Financial markets in Japan, Singapore, and China would likely follow the Hong Kong market, and the yen could start to rise in value as a hedge against uncertainty in the region. This is a problem for markets inside and outside the U.S. because the yen is a major source of international funding for asset purchases and investments in the U.S. and Europe. If the yen rises in value (especially in a market panic), the it becomes more difficult for stocks around the globe to rise. This is one of several issues that drove the selling in the stock market during the November-December 2018 bear market.

Performance of the Hang Seng Index

S&P 500

The S&P 500 was weak again today as investors worried about Hong Kong and trade. On a normal day, I would have expected stocks to rise in value after the Consumer Price Index (CPI) report was released this morning. The CPI data showed that prices of core goods have not grown as much as expected over the past month. That should have been a sign that the Fed is free to cut rates aggressively this year.

However, trade worries and a surprising build in oil inventories have kept prices lower. Additionally, The Wall Street Journal is reporting that Facebook, Inc. (FB) CEO Mark Zuckerberg was more aware of the nature of Facebook's misuse of customer data than originally known. Shocking no one, this revelation led to a discount in Facebook stock this morning, which has dragged on the tech sector overall.

From a technical perspective, the S&P 500 is still below the resistance level of its prior highs near 2,940, but an early drop wouldn't be impossible. If the S&P 500 starts to decline, I will be watching the trendline support level of the head and shoulders' neckline near 2,820 for a potential bounce.

Read more:

How to Plan for a 'Full-Scale Bear Market' Amid Investor Euphoria

Xbox Excitement Lifts Microsoft Stock to All-Time High

3 Stocks Under $5 Hitting New Highs

Performance of the S&P 500 Index

Risk Indicators – Gasoline Prices Could Boost Consumption

As I mentioned previously, a bad report for oil inventories, civil unrest in Hong Kong, and a strong yen are contributing to an environment where risk is rising. However, there aren't any signs of panic or outright bearishness like we saw last year.

One shift that could improve the outlook for the market is the price of gasoline. Just in time for the summer driving season, gas prices are dropping again. Although this is terrible for refiners like Valero Energy Corporation (VLO) or Phillips 66 (PSX), the less money consumers must spend on energy, the more they are likely to spend on other goods and services.

As you can see in the following chart, the price of gasoline futures is back below $1.70 per gallon, which is getting closer to the lows from the fourth quarter last year. According to JPMorgan analysts, consumers spend up to $0.80 of every dollar they saved on gasoline on other goods.

If current consumer spending trends remain consistent, the decline in gas prices should favor restaurants, consumer electronics companies, and department stores this summer. Those with very positive fundamental trends like Costco Corporation (COST) or Starbucks Corporation (SBUX) and less exposure to international trade like Netflix, Inc. (NFLX) could be positioned well to take advantage of an improved outlook for consumer spending.

Read more:

4 Factors You Didn't Know About RBOB

Consumer Spending as a Market Indicator

Analyzing Retail Stocks

RBOB Gasoline Futures

Bottom Line – Don't Worry Yet

There are several significant external risks to the market right now including President Trump’\/s ongoing threats to increase tariffs on trading partners and protests in Hong Kong. However, I stand by the call I made on Monday, and I still expect this to be a quiet week while investors position themselves for the Fed's big meeting next Wednesday. Keep your eye on the major indexes, but I recommend traders not be too concerned if there is some aimless volatility on Thursday and Friday.

Read more:

What Is the Federal Funds Rate?

Teva Stock Retests Lows After Judge Declines Settlement Offer

Learn the Basics of Investing

Enjoy this article? Get more by signing up for the Chart Advisor newsletter.

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.