Dow Drops as Bank Stocks Suffer; Hong Kong Airport Work to Resume Flights After Protests
PAULA NEWTON, CNN INTERNATIONAL HOST: You had the big ugly out there in the last hour of trade on Wall Street. As you can see nowhere to hide. The geopolitical fears are rising. The Dow now near the lows of the day, shares of industrial companies, banks, retailers all down, and this is what's moving the markets. Protest paralyze Hong Kong's airport. Cathay Pacific is caught up in the unrest and fashion companies find themselves targeted by Beijing. Goldman Sachs warns fears of a recession are rising as that trade war picks up. You'll hear exclusively from Goldman's CEO this hour. And an election surprise in Argentina is causing pain for the peso. Stocks selloff. Live from the world's financial capital, New York City. It's Monday, August 12th. I'm Paula Newton, in for Richard Quest, and this is QUEST MEANS BUSINESS. Okay, and let's get straight to those markets. The Dow is at the lows of the day. All major indices are off by about one and a half percent. Every single sector is down and that is key. Bank stocks are suffering the worst. Our Claire Sebastian has been following all the activity, especially in the last hour. We've certainly seen the selloff, continue apace. Why?</s>CLARE SEBASTIAN, CNN BUSINESS CORRESPONDENT: Well, I think it coincided with a drop or further drop. We've already seen them falling in the past week or so in bond yields. I think we can pull up the 10-year yield, but that dipped below 1.7 percent today. Those are very, very low levels that we are seeing, Paula, and this is a measure of the worries out there about the strength of the global economy, but in particular, the focus today is on trade. Multiple gloomy forecasts. Goldman Sachs saying that this is really starting to hit that base case scenario now for those next tranche of tariffs on $300 billion in Chinese goods that come in to force. That will eat into growth in the fourth quarter. Morgan Stanley coming out just today saying that the next round of tariffs is going to cut into muscle. It's really starting to get very real and people are lowering their growth forecast. We've got a lot of data coming out this week, and I think people are just piling out the stocks. I think it's really telling when you see every sector is lower, because people are not rotating. They're getting out and a lot of them are going into treasuries.</s>NEWTON: And that's the issue there. Right? It is that -- as I said, this is not a sector rotation, people are running and hiding. They're taking money off the table. Very quickly, in terms of what the Fed does, there's been so much discussion about where they go with something like this.</s>SEBASTIAN: You know, I don't think the question is so much whether they're going to cut rates. Again, the market is pricing in another -- at least another rate cut --</s>NEWTON: This quarter.</s>SEBASTIAN: If not, if not more than that this year. I think the question is are they really equipped to deal with this? The Fed -- you know, James Bullard was speaking last week, he said, they're not really equipped to deal with the day-to-day threats and language and rhetoric around this trade war. The risk is because there's a lag when the Fed implements policy, they have to wait and see if it works. If they act too fast, they could make a mistake.</s>NEWTON: Yes, it will be interesting to see especially the way those trade numbers as you said, impact global growth. Clare Sebastian will continue to watch the last hour of trade for us. Appreciate it. And we want to turn out Hong Kong. The city of expired teargas. That's according to thousands of prodemocracy protesters in Hong Kong, now enraged by alleged police brutality, currently paralyzing the city's airport. Now, 10 weeks on -- yes, 10. It's a clear display of the movements of power choking off one of the world's most vital transportation hubs and bringing Asia's financial epicenter to a grinding halt. Now, all departing flights -- think about that -- and more than 70 arriving flights were canceled Monday. This is of course a disaster for Cathay Pacific, which serves 200 cities out of Hong Kong, shares as you can imagine, closed down and severely nearly five percent. Cathay is also caught between the demonstrations and the demands from Mainland China. Now, the airline has outlined what they say is a Zero Tolerance Policy for its employees warning staff they could be fired for supporting the protest. Meantime, Beijing is sending a very clear message. China's state news agency released the video of the People's Liberation Army amassing across the border in Shenzhen. Ivan Watson has more for us now from Hong Kong.</s>IVAN WATSON, CNN SENIOR INTERNATIONAL CORRESPONDENT: Paula, Hong Kong's protesters have succeeded in a serious escalation in their campaign of civil disobedience, effectively bringing the city's international airport to a complete halt. That was the arrivals terminal over there, and up here, this is the departure terminal for an airport that handled some 74 million passengers last year. It's one of the busiest in the world. And now the departures terminal is virtually empty. There were hundreds of flights canceled when there were thousands and thousands of protesters here that forced the airport authority to close effectively most of the flights out of this airport.</s>WATSON: And now the walls of a place that was once a symbol of efficiency for Hong Kong, wallpapered with the slogans of the demonstrators alleging excessive use of police force. Graffiti as well, allegations that somebody lost an eye -- a woman in clashes between protesters and police. And then, of course, the passengers who have been left stranded now, and some of whom, in kind of scenes I've never seen before are camping out behind the check-in counters on the luggage racks right now, as everybody here tries to wait and see when this airport will begin resuming operations once again. And this has been going on. The cycle of confrontation in Hong Kong for more than 10 weeks with no end in sight, and a new tactic on the part of the protesters that will cost the city companies and passengers an incalculable amount -- Paula.</s>NEWTON: And thank you for that, Ivan. Now, earlier on Monday, as crowds began to descend on the airport, Chinese officials called for the authorities in Hong Kong to exercise a quote, "iron fist."</s>YANG GUANG, CHINSE GOVERNMENT SPOKESMAN FOR HONG KONG (through translator): For days, the radical protesters in Hong Kong have frequently used extremely dangerous tools to assault the police officers. Their deeds constituted severe violent crimes and showed the tendency of turning to terrorism. It is a blatant violation of Hong Kong's rule of law and social order, a severe threat to the safety of Hong Kong residents and a formidable challenge to Hong Kong's stability and prosperity. We must firmly tackle such violent crimes with a tough stance and no mercy.</s>NEWTON: Violent crimes and they should show no mercy. Jamie Metzl is a Senior Fellow at the Atlantic Council. His book is "Hacking Darwin," among other things that explores the U.S.-China rivalry over science and technology and a lot to talk about in that book as well. We're going to go to the issue at hand right now, which is Hong Kong, Jamie, and we've all been watching just to see where it's going to go. You know, you made the point to me the other week that you know, in Hong Kong, these protesters, it's an existential crisis, right? Politically, where are they going? And yet, right now, the economic implications are starting to bite as well.</s>JAMIE METZL, SENIOR FELLOW, ATLANTIC COUNCIL: Well, this is huge, not just for Hong Kong, but for all of China. Hong Kong is a little corner of China where the rule of law applies, where you can have contracts, where there are courts that are legit, where there's some level of popular involvement in governance. And what's happening in Hong Kong has big obvious implications for Hong Kong, but also reverberations for China. For those of us who are imagining that someday China could be a country where rule of law exists, we should all care a great deal about what's happening in in Hong Kong. So for sure, this is going to hurt the Hong Kong economy, but Hong Kong is part of this Greater China and greater Asia ecosystem, and we all really need to care a lot about what happens there.</s>NEWTON: And in terms of what happens there, you've argued that it also has implications, wider implications for places like Taiwan.</s>METZL: Absolutely. So, China promised Hong Kong, this one country two systems model, not just Hong Kong, they promised that to Britain. They signed an international agreement. And that's the foundation for peace, security and stability in Hong Kong. And it's very clear now that China is working in many ways to renege on its commitments, as it limits the space for Hong Kong's autonomy. And for people in Taiwan, where China is saying Taiwan is part of China, and maybe they can have one country two system model. If you're in Taiwan, and you're looking at how China is treating Hong Kong, how could you possibly imagine that there's a good model for a closer relationship between Taiwan and China? So really, what's at stake is the future of China and the model of how China is going to relate to everybody else, and the signs are certainly ominous.</s>NEWTON: And isn't this ominous as some of the language obviously, coming from China. You know, we just played that clip where we're talking about an iron fist. They've been called -- they've been calling the protesters terrorists, and yet, I can't get a straight answer even from pro-Beijing legislators in Hong Kong. They continue to tell me, "Look, there's no way the Chinese government is stepping into Hong Kong." Others are skeptical. My question to you is, even if they do that, there is no easy answer there for the Chinese government either, is there? Even in trying to take that?</s>METZL: Well, China is in a tough position because if they do nothing, this push for greater autonomy and for the democracy that the people of Hong Kong were promised is going to grow because the people of Hong Kong have a legitimate gripe. They were promised things and China has reneged on those commitments. China now as you reported, they are massing riot troops. I mean, they call them riot police, but they are essentially paramilitary and they look like military. They're in big in --</s>NEWTON: That's the way they've been trained, which is key.</s>METZL: And that's way they've been trained, and so they are right on the border. Are they going to go in today or tomorrow? I would say almost certainly not. But China is delivering a message, not just to the people of Hong Kong, but to the leaders of Hong Kong, which is, you better get a handle on this, or we're going to move in. And that's why the international community needs to be absolutely crystal clear that we stand with the people of Hong Kong. We stand for democracy, we stand for rule of law. Are there troublemakers among the Hong Kong protesters? I'm sure there are some. It's been -- by and large, they've been very well behaved. But there are, I'm sure there are a few troublemakers here and there. But we need to be clear about what this is about. And it's about standing up for rule of law, standing up for international agreements that China itself has signed and laying a foundation for an Asia-Pacific region and a China that plays by these standards and international norms that will help everybody and ideally, including China.</s>NEWTON: You know, which plays a lot into the trade negotiations that are going on right now. At what point, in terms of what's going on in Hong Kong begins to have been, in fact, the things that are going on in trade relations, and I say this knowing that the Trump administration has been very careful to back away from saying anything about Hong Kong, really?</s>METZL: Well, the Trump administration is mixed. On one hand, President Trump has said, "Well, what happens in Hong Kong is China's business." On the other hand, Secretary Pompeo and Majority Leader McConnell, they've actually been very strong in their statement saying, "Look, Beijing, we have our eyes on Hong Kong. We support the autonomy that was promised to the people of Hong Kong and we're not going to stand back." If China thinks they can just march into Hong Kong with whatever you want to call them, paramilitary forces, and there's not going to be a cost. They are wrong, there will be a massive cost to China. And yes, this relationship is incredibly complex. And there's all kinds of things that are happening in the context of the trade war, and Hong Kong will play into that.</s>NEWTON: Yes, and certainly, these are the beginnings. Who could have predicted that we would be here especially after in 2014, the Umbrella Protest kind of petered out? The book is "Hacking Darwin." Jamie Metzl. Thanks so much. Really appreciate it.</s>METZL: My pleasure.</s>NEWTON: Now, a backlash of another kind, luxury brands -- Coach, Versace, and Givenchy apologized to their Chinese consumers for seemingly referring to Hong Kong and Taiwan, as independent from China. Now, you can see it here a Coach shirt, their references caused an uproar on Chinese social media. Hadas Gold joins me now from London. Hadas, this is really interesting. And I pointed out to you before that it's not just the Chinese government that has their so-called red lines, right? I mean, the Chinese consumers were loud and clear with these brands.</s>HADAS GOLD, CNN BUSINESS REPORTER: Oh, Paula, definitely. They were very loud and clear on social media. In fact, Coach was the most searched for term on the Chinese site, Weibo, sort of their version of Twitter on Monday. And it was how these t-shirts were portrayed that got these brands into a lot of hot water. As you showed on screen, they sort of look like tour t-shirts with different cities on the back. But then users were pointing out as you can see there with the underline that certain cities were marked differently and not as part of China even though China treats them as they are a part of China, calling it part of the One China policy. It wasn't just social media users that were calling this out. A lot of these brands lost some of their big brand ambassadors. These are well known actors, boy band members, singers, who all cut their ties as brand ambassadors for these brands, all because of how they listed these cities on the t-shirts. It shows you just how sensitive the situation is, right now in China, especially around places like Hong Kong, and how seriously these things are taken by the Chinese people and by Chinese celebrities. Now, all of the brands came out almost immediately apologizing for the shirt saying they had either already pulled them, we're destroying them or they were old designs. Givenchy said that they had always respected China's sovereignty and firmly adhere to the One China principle. And actually Donatella Versace went so far as to post on her own personal Instagram saying that she never wanted to disrespect China's national sovereignty, and that this is why she wanted to personally apologize. Now, how quickly they acted not only goes to show you about how sensitive the situation is there, but also how important the Chinese market is for the luxury brand market. If you think about Chinese shoppers, they are responsible for a third of the global luxury sales. And according to McKinsey, that could be about $7 billion a year. Clearly, they don't want to do anything to upset their customer base there. That's so important for them, especially as many of these brands are looking to expand even further in the Asian market -- Paula.</s>NEWTON: Yes, it's certainly a market that they cannot ignore. Quickly, Hadas. What I don't understand here is how these mistakes continue to be made by these kinds of corporate giants?</s>GOLD: And that's what a lot of these companies said that they will try to make sure in the future that they won't run into this before, but it's not just actually clothing brands who have run into this with China specifically. We've seen airlines run into this. We've seen other brands run into this with China specifically. It goes to show you that now with everything sort of globalized, everything blowing up on social media. How important it is to cross your T's and dot your I's on anything that's even so simple as a t-shirt that list some cities on the back, it can completely blow up and could potentially really harm a company's brand.</s>NEWTON: Yes, and how important diversity in that management structure would be going forward, so you can point those mistakes out.</s>GOLD: Exactly.</s>NEWTON: Hadas, thanks so much. Appreciate it. Now, Goldman Sachs says fears of a recession are growing, an exclusive interview with CEO David Solomon. That is next.