China, Hong Kong stocks extend losses after Fed minutes stoke rate rise fears

Investors are cautious because of increased expectations of a hike in US interest rates.

PUBLISHED : Thursday, 19 May, 2016, 9:18am
UPDATED : Thursday, 19 May, 2016, 7:12pm

The Shanghai benchmark index inched lower for a third straight session on Thursday, after hawkish Fed minutes released on Wednesday sparked fears of an early interest rate increase and triggered a sell-off in global risk assets. Hong Kong shares also retreated for a second day in a row.

However, China-listed steelmakers soared on Beijing’s vows to address overcapacity amid weakening underlying demand and rising trade tensions.

The Shanghai Composite Index opened slightly lower, then was pushed into positive territory mainly by gains in steel and metal sectors. However, the index was dragged lower by financial shares in late afternoon session and swung between small gains and losses in the final hour of trading. It nudged lower by less than 0.1 per cent, or 0.6 points, to close at 2,806.91. The large-cap CSI300 edged down 0.2 per cent, or 5.54 points, to 3,062.50.

But Shenzhen stocks registered modest gains, with the Shenzhen Composite Index rising 0.6 per cent, or 9.8 points, to end at 1,775.88. Startup board ChiNext Index also settled 0.8 per cent, or 16.93 points, higher at 2,037.40.

Combined turnover for Shanghai and Shenzhen decreased about 10 per cent to 376 billion yuan from Wednesday.

The US Federal Reserve may be considering an interest rate increase in June if incoming economic data are “consistent with economic growth picking up in the second quarter”, minutes of the Fed’s April policy meeting showed on Wednesday.

“What is clear from the minutes and recent speeches from Fed speakers is that the Fed is very keen to try and get two rate hikes out this year,” said Angus Nicholson, an analyst for IG Group. “And if that is the case, there will be a strong push to try to raise rates in June or July.”

Markets have been “dramatically” repricing this potential Fed rate rise, he added.

“The US dollar has strengthened and will likely rise further, causing the Chinese yuan and other emerging market currencies to weaken. A shares may continue to fall before the US Federal Reserve meeting in mid-June,” said Shenwan Hongyuan Securities analysts Stanley Kao and Freddy Chan in a note on Thursday.

China’s cabinet State Council on Wednesday said the country aims to cut 10 per cent of production capacity in steel and coal companies owned by the central government in 2016 and 2017. It is the latest pledge by the central government to address overcapacity issues as China struggles with slowing economic demand and growing trade friction.

In Chinese markets, steelmakers jumped. Gansu Jiu Steel Group Hongxing Iron & Steel rose 6.9 per cent to 2.63 yuan, Inner Mongolia BaoTou Steel Union climbed 3.9 per cent to 2.92 yuan, and Liuzhou Iron & Steel advanced 2.2 per cent to 3.32 yuan.

In Hong Kong, the benchmark Hang Seng Index finished lower, off 0.7 per cent, or 132.08 points, to 19,694.33. The Hang Seng China Enterprises Index lost 0.7 per cent, or 57.81 points, to 8,243.20. Turnover shrank to HK$56 billion yuan from HK$59 billion the previous day.

“It was bad news for the Hong Kong market when US Fed increased expectations of an interest rate rise,” said Linus Yip, chief strategist at First Shanghai Securities. “Investors will take a wait-and-see approach now.”

Yip said Hong Kong stocks may continue to swing between gains and losses in coming months.

Downside risks also include the chance of voters in the United Kingdom choosing to leave the European Union at a referendum next month, Yip said.

In Hong Kong, Chinese online major Tencent Holdings pulled back 2.4 per cent to HK$157.2, after the company released its first-quarter results on Wednesday evening. Tencent’s quarterly net income jumped 33 per cent to 9.2 billion yuan, beating market expectations, according to the company’s statement.

With additional reporting from Celia Chen