It's been a wary night of trade with risk-off flow dominating Asian and early Europen dealing as escalating tensions between US and China had investors on edge.

The dollar was mildly bid across the board and US stock index futures were lower by about 50 basis points with markets fearful that US-China war of words may become a much more serious political conflict.

The latest salvo from Beijing was the introduction of a new Security Law. As well as criminalizing "treason, secession, sedition (and) subversion" against the central government, it will also enable Chinese national security organs to operate in the city "to fulfill relevant duties to safeguard national security in accordance with the law." The law would effectively destroy much of Hong Kong's autonomy and sent a shiver through the island's capital markets with Hang Seng dropping the most since 2015. China was quick to note that this was an internal matter and would not accept any interference from the outside world but given the already negative sentiment against China in the US Senate some political and economic response is sure to come.

For now, the markets remain wary rather than reactive with only a muted response in price action as traders watch the Sino-US relations deteriorate. The bulls continue to control the market as every dip is bought and the recovery thesis trumps all geo-political risks for now. With no US data on the docket, it will be interesting to see if the bulls can rally prices into the long holiday weekend. We are skeptical they can do so. Given the dour economic backdrop and the very real possibility of violence in Hong Kong, the risks to the downside have increased markedly and markets will only be able to ignore them for so long before selling pressure begins to take hold.

Author

Boris Schlossberg

BKTraders and Prop Traders Edge

Boris Schlossberg was key speaker at the FXstreet.com International Traders Conferences 2010. Mr. Boris Schlossberg is a leading foreign exchange expert with more than 20 years of financial market experience.

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