Asian shares are likely to dip on Thursday after remarks by U.S. Secretary of State Mike Pompeo that Hong Kong no longer warranted special treatment under US law reignited worries about worsening relations with Beijing.
After posting early losses, E-Mini futures for the S&P 500 edged up 0.03%, while Nikkei futures pointed to a loss of 10 points.
Pompeo said overnight that China had undermined Hong Kong's autonomy so fundamentally that the territory no longer warranted special treatment, a potentially big blow to the city's status as a financial hub.
Some investors worry a punitive U.S. response to China on the issue of Hong Kong could result in a tit-for-tat reaction from Beijing, further straining ties between the world's two biggest economies and further hobbling global growth.
"All eyes remain on the U.S.-China relationship," said Chris Weston, the head of research at Pepperstone, a currency broker. "This is a risk for markets...one questions if the equity markets are too complacent here."
The S&P 500 had closed above 3,000 for the first time in almost 12 weeks, bolstered by bank stocks, as investors hoped that the world economy can recover as it re-opens.
The S&P 500 has leapt about 36% since the global coronavirus pandemic dragged it to the year's low on March 23, but there are concerns the rally may be overdone and susceptible to a protracted pullback given the U.S. economy is mired in its worst downturn since the Great Depression.
Bond investors seemed to agree more circumspection is needed. Ten-year U.S. yields dipped to 0.6770% from 0.6802% overnight. Although 10-year yields are up from an all-time low of 0.4980% struck in March, they are still a whopping 120 basis points below highs seen in January.
President Donald Trump will now decide how many U.S. economic privileges Hong Kong should still enjoy. Sources have said the U.S. government may suspend Hong Kong's preferential tariff rates for exports to the United States, a far less severe response than formally revoking Hong Kong's special status under U.S. law.
Trump said he'd announce a response to China's policies towards Hong Kong later this week.
Oil futures took a beating as investors fretted about Trump's response to China. U.S. crude oil futures fell more than 1% to $31.45 early Thursday.
Uncertainty over Hong Kong's future dragged the yuan in offshore trade to a record low of 7.1966 per dollar. It recouped some of its losses by early Thursday and was firmer at 7.1792.
The euro, however, was buoyed by a 750 bullion euro plan to shore up economies hammered by the coronavirus pandemic.
That pushed the euro to an eight-week high and by early Thursday, the common currency had nudged up 0.1% to 1.1014, while the U.S. dollar index was down 0.09% at 98.927.
Gold investors, on the other hand, appeared to shrug off geopolitical risks and focused instead on optimism around the re-opening of the world economy, paring their holdings of the safe-haven metal. Prices extended overnight losses and spot gold traded at $1,708.60 per ounce.