Stocks Fall As U.S. Bill On Hong Kong Derails Recent Trade Deal Progress

Topline: The stock market fell on Friday thanks to renewed trade fears after Trump signed a bill that supports pro-democracy protests in Hong Kong, prompting a stark reaction from China and threatening to derail recent progress between the two countries on a phase one trade deal.

  • The stock market fell on Friday, as recent trade optimism faded on Wall Street: The S&P 500 and Dow Jones Industrial Average both lost 0.40%, though both indexes are still on track for their best monthly gains since June. 
  • The stock market has been hitting new records recently amid stronger-than-forecast economic data, suggesting that the economy will continue its moderate pace of expansion in the fourth quarter, and better-than-expected corporate earnings last quarter.
  • Much of the market’s recent rally has also been due to rising optimism on a trade deal, with Trump commenting earlier this week that the U.S. was in the “final throes” of the important phase one agreement with China.
  • But Hong Kong has recently emerged as a major point of contention that could derail recent progress on trade negotiations: After the Senate passed the bill to support Hong Kong protestors, China accused the U.S. of interfering in its domestic affairs. 
  • After being relatively silent on Hong Kong in recent weeks, Trump went ahead and signed the bill in support of the protestors into law on Wednesday, sparking outrage from China, which on Friday promised to retaliate with “strong counter-measures.”

Crucial quotes: “China firmly opposes the Hong Kong Act. We have made stern representations and strong protests to the U.S.,” a spokesman for the Chinese Foreign Ministry said in a briefing Friday. “It is a stark hegemonic practice and a severe interference in Hong Kong affairs, which are China’s internal affairs. … China will take strong counter-measures.”

Announcing his decision on Wednesday, Trump said he signed the bill “out of respect for President Xi, China and the people of Hong Kong. They are being enacted in the hope that leaders and representatives of China and Hong Kong will be able to amicably settle their differences, leading to long-term peace and prosperity for all.”

Key background: Pro-democracy protests erupted in Hong Kong almost six months ago over a bill that would extradite those accused of committing a crime in Hong Kong to mainland China. While the bill has been withdrawn from consideration, citizens are now demanding more democratic rights like universal suffrage—often leading to violent clashes between protesters and police officers.

Until Wednesday, it had been unclear whether Trump would sign the U.S. bill on Hong Kong into law. Amid ongoing trade negotiations with China, he had stayed relatively silent on the subject, though he acknowledged it as a “complicating factor.” In an interview on Fox and Friends last week, Trump said, “We have to stand with Hong Kong, but I’m also standing with President Xi,” when asked if he would sign the bill.

What to watch for: While China is yet to specify what their countermeasures will be, Wall Street is worried that contention over Hong Kong could strain trade negotiations or even derail them completely. The next round of tariffs, scheduled to kick in on $156 billion worth of Chinese goods starting December 15, will be a crucial telling point for Wall Street investors—especially as the stock market looks to end the year strong.

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