Stocks tumble on doubts over rate-cut effects

PUBLISHED : Thursday, 31 January, 2008, 12:00am
UPDATED : Thursday, 31 January, 2008, 12:00am

The Hang Seng Index tumbled yesterday as investors feared a widely expected interest-rate cut from the United States Federal Reserve would not be enough to put a lid on mounting subprime mortgage losses.

Stocks opened higher after Tuesday's gain, but any hopes of building positive momentum were dashed during an afternoon sell-off that sent the market tumbling.

The blue-chip index closed with a loss of 638.11 points or 2.63 per cent at 23,653.69.

Investors were betting the Fed would cut rates by 0.5 percentage point after reducing its benchmark rate by 0.75 percentage point at an emergency meeting on January 22.

Investors cut and run when the banking industry was rocked by news that UBS, Switzerland's largest bank, posted a record loss after incurring about US$14 billion in losses related to subprime mortgages.

'Market sentiment is definitely on the weak side,' said Pauline Dan, a portfolio manager at Manulife Asset Management. 'It is not just the UBS numbers, but there are rumours that Merrill Lynch could see more write-offs as well.'

Merrill Lynch reported US$16.7 billion in write-downs for the fourth quarter and investors had speculated that the world's largest brokerage might not be out of the woods yet, said Ms Dan.

Merrill Lynch was not the only US bank to come under suspicion and so long as the subprime crisis remained unresolved, it would continue to destabilise the market, she added.

In late trade, the London market was down 0.66 per cent while Paris was off 1.36 per cent and Frankfurt was 0.24 per cent lower. On Wall Street, the Dow Jones fell 0.35 per cent by noon.

Negative sentiment was reflected in the local index futures market yesterday as February futures fell 706 points to settle at 23,619 and January futures, which expired after the market closed, dropped 221 points to 24,065.

Financial stocks were targeted after the UBS news, with Industrial and Commercial Bank of China, the world's largest bank by market value, sliding 4.09 per cent to close at HK$4.69.

Bank of Communications fell 5.37 per cent to HK$8.99, extending losses to 37.83 per cent since the Hang Seng Index peaked on October 30. The index has fallen 25.24 per cent over the same period.

Mainland insurance stocks also paced the rout in the market. China Life Insurance, the country's largest insurer, plummeted 7.35 per cent to HK$29 while Ping An Insurance (Group), the second-largest insurer, fell 6.51 per cent to HK$57.40.

Bear Stearns cut China Life to 'underperform' and Ping An to 'peer perform' on expectations the slump on the mainland stock market will cut their investment revenue.

While signs of gloom are growing, some say the Hong Kong market is strong enough to weather the storm.

'A few signs of a bear market have appeared but it does not necessarily mean the market has really turned into a bear,' said Castor Pang, a strategist with Sun Hung Kai Financial.

Investors should brace for more ups and downs, but the strong economy and the knock-on effect of robust mainland growth had provided 'solid fundamentals' for the long-term health of Hong Kong's market, he said at a presentation on Tuesday.

With additional reporting by Jonathan Yang

Bets on the cut

Investors are expecting the Fed will cut rates by 0.5 percentage point

Since hitting its record high in October last year, the Hang Seng Index has fallen: 25.24%