Good news, fears put market at crossroads

PUBLISHED : Monday, 04 July, 2011, 12:00am
UPDATED : Monday, 04 July, 2011, 12:00am
 

The Hong Kong equities market got a boost on Thursday from the news that the Greek parliament had voted in an austerity package, which eased fears of a default in that country and an ensuing markets contagion.

The market last week continued to be buoyed by comments from Premier Wen Jiabao that the mainland would meet its inflation targets. The Hang Seng was up 1 per cent last week.

'There was a nice bounce last Friday [June 24] when Premier Wen said inflation was under control,' Eddy Loh, equity strategist, Asia, Barclays Wealth, says. 'Other positive news was that the [mainland] government debt was lower than expected, and that China was cutting the fuel import tax on Monday [June 27].'

The big gainer of the week was Minth Group (425), which supplies parts for the Japanese car market, with the stock up 16.5 per cent. The counter rose partly on the view that Japanese car production was normalising, with production lines for Honda and Toyota vehicles set to resume on the mainland in the third quarter.

Wharf (4) had a good week, up 3.4 per cent. That, perhaps, was a surprising outcome given Beijing's plan to cut the tax on luxury goods is projected to hurt tourism shopping sales in the retail hub of Causeway Bay. Wharf owns the area's prime retail property: Times Square.

Wharf got a boost last week from news that Swire Pacific (19) was in talks to sell its shopping mall, Festival Walk, for an estimated HK$22 billion, a high valuation that raised estimates of the value of Times Square.

The big loser for the week was China Yurun Food Group (1068), which fell victim to market rumours that it would be the subject of a report by the short-selling specialist Muddy Waters. The company convened an analysts' meeting and said it knew of nothing that should concern the market, and almost all analysts affirmed their ratings on the stock. Such is the fear throughout the market of a Muddy Waters report that Yurun was down 14.9 per cent in the week. (See Market Calls, Page 3). Muddy Waters also targeted the Nasdaq-listed mainland chip company Spreadtrum Communications last week.

Traders are following a number of key trends. They are looking at China Manufacturing Purchasing Managers Index data for signs that the mainland economy is heading for a hard landing.

They are looking at the mainland banks for signs of a growing non-performing loan problem. They are also looking at the IPO market for further evidence of weakness.

They are watching for the rogue element of another Muddy Waters report (real or rumoured) targeting another mainland stock. (See Naomi Rovnick's column, above)

'If market concerns on China going into a hard landing increase, it will lead to a sell-off of the cyclical stocks such as the steel sector,' says Loh. 'However, a slowdown may lead to the government loosening its policies a little, which could include a slower pace of interest rate and reserve ratio requirement rises, especially if inflation were to moderate.'

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