Fed move seen sparking HSI rally
Hong Kong's stock market is set to put in a strong performance today if it takes a lead from the region's markets, which rallied yesterday following favourable news on interest rates.
Asian markets and early European trade yesterday saw exuberant action after the United States Federal Reserve Board announced a 25-basis point rise in the US federal funds, or overnight bank lending rate.
More favourable than the minimum interest rate rise was the Fed's announcement that it was shifting to a neutral stance going forward.
It had noted a bias towards tightening before the increase on Wednesday.
The news softened bond yields in the US and spurred a rally on Wall Street.
'It is fair to expect the worst-case scenario has changed to an increase of 50-basis points in total by the end of this year, from no less than 75-basis points people had previously anticipated,' said Commonwealth Bank of Australia treasurer Andrew Fung Hau-chung.
Mr Fung said he did not expect that the Hong Kong Association of Banks would follow the Fed's move in its weekly policy meeting today as funding costs had not been increased and the local currency exchange rate was not under strain.
While short-term interest rates have moved up by about 50 basis points in the past two weeks, this had not put pressure on the prime lending rate for big customers.
This was because Hong Kong's banks were awash with liquidity as corporate lending has slowed drastically since the financial crisis of 1997, while deposits were steady, said Mr Fung.
Brokers agreed that an increase by the association was unlikely and said Hong Kong's stock market would take the Fed news well.
'Hong Kong is more sensitive to a US rate rise [than other Asian bourses]. That's why we will have a good market,' said Worldsec International director Carlton Poon.
'It's not so much the 25-basis point rate rise but that there will be no [further] rate rises. That concern will be lifted for the time being.' On Wednesday, the Hang Seng Index closed down 233.35 points, or 1.69 per cent, to 13,532.14, with some selling pressure coming from nervousness before the Fed decision.
'There were some rumours about [Premier] Zhu Rongji on Wednesday, but the main concern was that the rate rise would be more than 25 basis points,' said Delta Asia Securities research manager Ricky Tam Siu-hing.
Yesterday, Beijing denied that Mr Zhu had offered his resignation, rumours of which were thought to have put pressure on mainland shares over the past two days.
Mr Tam said he expected the focus to return to Hong Kong's blue chips, whose turnover has been dwarfed by mainland-related plays recently.
For instance, he estimates that only a third of Wednesday's $12.03 billion in turnover was in blue-chip stocks.
'The blue chips will come back into the spotlight, especially the property stocks,' Mr Tam said.
Hong Kong's overnight interbank lending rate is about 50-basis points above the US Fed funds rate after the increase, which nudged it up from 4.75 per cent to 5 per cent.
Signs of pressure on the Hong Kong dollar - seen fleetingly late on Wednesday amid the Zhu rumours - eased yesterday as the one-year forward premium ended at 830 points from 900 points the day before.
The Hong Kong dollar spot exchange rate remained stable.