Stocks enjoy a sharp technical rebound as short-sellers cover

The Hong Kong market caught a nice bounce on Tuesday and Wednesday last week, thanks to hopes that European leaders might yet contain that region's debt crisis. The German lower house voted on Thursday in favour of expanded powers for the European Financial Stability Facility, which is a key bailout fund supporting Greece.

There is increasing hope that fixes such as more Greek austerity and a plan to force losses onto holders of Greek debt may yet draw a line under this issue.

As Greek fears subsided, Hong Kong equities showed every sign of being on a technical rebound.

The main boost came on Tuesday, when investors swung en masse to the view that the Greece problem was not as bad as feared, sending Industrial and Commercial Bank of China (1398) up 9 per cent and Emperor Watch & Jewellery (887) up 8.9 per cent on the day.

Renhe Commercial Holdings (1387) spiked 20.3 per cent on Tuesday and Wednesday, clawing back some of the losses seen the previous week. Euro-zone bellwether stock Esprit Holdings (330) climbed 20.4 per cent on the two-day relief rally.

Todd Martin, Asia equity strategist for Societe Generale, sees another dynamic playing out in the market. He describes the China/Hong Kong market as the 'world's most crowded short'. He says this is because hedge funds have been restricted from short selling in much of Europe (and are therefore taking the strategy to Asia) and because China is at the height of a monetary tightening cycle and is therefore an easy target.