Rate cut spurs broad advance

PUBLISHED : Sunday, 18 October, 1998, 12:00am
UPDATED : Sunday, 18 October, 1998, 12:00am

HONG KONG capped an already strong week with its biggest single-day gain in eight months as a fresh cut in US interest rates cheered investors.

The Hang Seng Index closed the week at 9,777.01, its highest level since May and a 14.93 per cent gain on the week. The biggest beneficiary of this was the biggest holder of Hong Kong stocks - the interventionist Government. Analysts have cautioned that markets are overshooting since regional bourses began barrelling ahead this month. Yet the gains only continue to extend themselves.

For Hong Kong's Government, the turn of luck has put it in a position to claim triumph over the speculator scumbags of the world. Not to mention thumb its nose at intervention nay-sayers such as nobel laureate Milton Friedman.

The recent surges in regional markets were originally motivated by rapid reversals in the yen, which has gained 20 per cent against the US dollar in two weeks. Many analysts are sceptical those gains are sustainable.

Some analysts, such as Independent Strategist managing director David Roche and Credit Lyonnais Securities Asia economist Jim Walker, believe the yen will lose all its gains by the end of the year.

Both point out that the yen's rise was turbo-charged by an unwinding of positions by hedge funds that were getting hit in all directions, from bets ranging from Russia to municipal bonds in the United States.

Thus, they say, much of the yen's rebound has been technical.

Fundamentally, Japan still faces sluggish growth and unresolved problems in the financial system.

However, now the yen has the cushion of a second cut in US interest rates. That the Fed made such a move signals that its outlook on the US economy is increasingly less rosy. And a weakening economy perhaps does not deserve such a strong dollar.

Even if this rally does prove to be a sucker's one, it has energised a region that was recently deep in the doldrums. With Hong Kong's developers selling flats at below cost and banks suffering interbank borrowing rates higher than their own lending rates, who would have thought property stocks could motor 50 per cent in less than a month? Brokers, many of whom have been fearing that 'Do you have a moment?' call from the personnel director, enjoyed seeing trading volumes nearly double last week compared to the week before.

Some argue that such reprieves are no good for Hong Kong or the region. They will only give companies and governments excuses to put off needed reforms and gloat over victories that will prove to be pyrrhic.