MORNING BID-A turn for the worse

(A look at the day ahead from EMEA deputy markets editor Sujata
Rao. The views expressed are her own.)

* Note: There will be no Morning Bid on Monday, May 25,
because of
a public holiday in the UK.
Things have taken another turn for the worse between the world's
two superpowers. Escalating rhetoric from President Donald Trump
hit Wall Street yesterday, but Asian markets today are red all
over following China's proposal for a new Hong Kong law to ban
sedition, secession and treason. That will almost certainly
reignite protests in Hong Kong and drive another wedge with
Washington.

The Hang Seng index plunged 5% at one point and the Hong
Kong dollar slid the most in six weeks. Broader Asian shares
lost 1%. World stocks are down around 0.7%, but that may pick up
steam as a pan-European index is down 1.5% and Wall Street is
expected to open weaker. The offshore yuan is approaching a
three-week high beyond 7.14, and mainland blue-chip shares have
fallen almost 2%.

Another headwind – China dropped its annual growth target
for the first time since 1990, with Premier Li Keqiang warning
of "unpredictable factors".

Overall, the risk-off mood sent 10-year U.S. Treasury yields
to a four-day low and the dollar index marching higher for a
second day. Beijing's failure to publish growth targets has sent
commodity prices reeling, in turn inflicting losses of 0.7% to
1.3% on currencies such as the Aussie dollar, South African
rand, Norwegian crown and Russian rouble. The euro is off
yesterday's two-week highs.

The setbacks have put paid to hopes of a market rebound as
economies re-open. That COVID-19 risks remain alive was shown by
India, which posted its biggest ever 24-hour rise in new
infections after easing its lockdown. Without a vaccine, there
seems little chance economic activity can normalise -- Federal
Reserve Chair Jay Powell warned again yesterday of a "downturn
without modern precedent".

In another sign of the times, India cut its benchmark repo
rate by 40bp to 4% in an unscheduled move.

We get minutes from the European Central Bank's last meeting
-- interesting given markets widely expect the bank to expand
its emergency stimulus programme on June 4. All eyes are also on
next week's European Commission meeting, which will debate the
Franco-German proposal for a joint recovery fund. The proposal,
marking a huge change in the German stance, has already pushed
Italian yields into their biggest weekly fall in two months.

The UK negative interest rate debate is being kept alive by
miserable economic data, not least the record 18% crash in April
retail sales. Sterling is again below $1.22 and seven-year UK
borrowing costs have just gone negative.

"Real" gilt yields, read from inflation-linked debt, bear
watching – these have collapsed 60 to 80 basis points since
mid-March, with 10-year linkers yielding minus 2.9%, Tradeweb
data shows.

In European corporate news, stocks exposed to Hong Kong --
HSBC, StanChart and various luxury firms --
are suffering. Burberry reported a 27% quarterly drop in
comparable sales, and pulled its final dividend.

Abu Dhabi's Etihad Airways is planning to lay off 1,200
employees as it considers permanently grounding its Airbus A380s
and never operating the A350s it has ordered. Fiat Chrysler said
auto sales in Brazil were down 70% to 75% in May versus a year
ago. Carmaker Nissan is considering 20,000 job cuts.

On bonuses and dividends -- Lloyds Banking Group
investors rebelled against its policy for top bosses. United
Utilities Group posted a 9% rise in full-year operating profit,
but will review its 5-year dividend policy.

Equity-raising continues -- On The Beach Group will raise
around 20% of its share capital, while Time Out magazine is
launching a share sale to cut debt.

In emerging markets, a big day for Argentina, which will
mark its ninth sovereign debt default by missing a $500 million
debt payment. But good news for Ukrainian bonds: the country
signed a new $5 billion, 18-month stand-by deal with the
International Monetary deal.