Asian markets were weak as investors braced for a further escalation of US-China tensions as they looked past the positive data overnight from the world’s largest economy and an EU stimulus.

Overnight, US jobless numbers shrank for the first time since the coronavirus pandemic began with those seeking benefits fell to 21.1 million for the week to May 16. Economic recovery hopes were also triggered by the European Union’s announcement of a 750-billion-euro coronavirus recovery fund.

But the focus has now shifted to US President Donald Trump’s press conference on China today where he will detail his response to China’s parliament approving a national security law for Hong Kong.

Japan’s Nikkei edged down 0.28%, South Korea’s benchmark Kospi inched down 0.1% and Australia’s S&P ASX 200 index slipped 1%.

Hong Kong’s Hang Seng index dropped 0.8% and the CSI 300 was marginally lower at 0.1% as the US reaction to China’s move was awaited.

DBS economists say this may put the issue on the agenda of the G7 Summit delayed by the White House to late June. The broad market expectation was that tensions between the world’s two largest economies would remain elevated ahead of the US elections.

“The path looks set for further confrontation in the run up to November, most particularly with the world media’s attention again now front and centre on Hong Kong. The risk now is that Hong Kong becomes a political football in the US-China dispute,” Jefferies’ Global Head of Equity Strategy Christopher Wood said.

“Whichever way US politics goes in November, Beijing will have seen enough already to assume that a Cold War outcome is now a distinct possibility, if not yet necessarily a probability. This means that in the political area it has less incentive to play nice in its dealings with Hong Kong and Taiwan, while in the technological area it will be more determined than ever to end its dependence on US technology.”

Credit markets also turned cautious and issuers paused awaiting the next window of opportunity after the recent spate of issuance. The Asia IG index widened 2 basis points at 101/102 bps and sovereign names were 1-2 basis points wider.

Overnight the Dow Jones Industrial Average dipped 0.58%, the S&P 500 fell 0.21%, and the Nasdaq Composite ended 0.46% lower, as worries about escalating tensions rattled investors.

In the week ahead, financial markets will eye PMI business surveys which will provide the first major insights into global economic trends in May, after showing early signs of a pick up in April.

“If lockdowns are lifted further in coming months, as planned, a return to growth looks possible for many economies as we head into the third quarter,” said Chris Williamson, Chief Business Economist at IHS Markit.

”With markets showing signs of reduced pessimism on the economic outlook, analysts will therefore be hoping that the final global PMIs will confirm an easing from April’s unprecedented rate of economic contraction.”

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