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SCMP Reporter

HONG KONG stocks dropped sharply yesterday as Friday's collapse on Wall Street and the Chinese military exercises near Taiwan exploded fragile sentiment.

Regional markets headed down across the board following news the US economy is starting to pick up and is unlikely to need further interest rate cuts in the short term.

But they are expected to recover some of their lost ground today after Hong Kong stocks in London rallied towards the close of trading and the Dow Jones Industrial Average moved up strongly in the morning session of trading on Wall Street.

The Hang Seng London Reference index ended 119.9 points higher at 10,517.35, having been as low as 10,312.66 earlier in the day. The Dow Jones was up 36.8 points at 5,507.3 at 1 pm.

The prospect of lower rates has boosted most stock markets this year and the change in sentiment when the US employment figures were released on Friday was enough to send Wall Street and regional markets sliding.

Abbott Lau, salesman at Schroder Securities Asia, said: 'Hong Kong was unexpectedly weak and all of the emerging markets in the region were sold down.' The Hang Seng Index tumbled 820.34 points or 7.31 per cent to 10,397.45, its biggest points loss since the October 1987 crash.

The fall wiped out more than $190 billion from the market's total capitalisation. Other regional markets fared little better.

The Indonesian benchmark index dropped 4.62 per cent, Australia's lost 3.54 per cent, Singapore's plunged 3.52 per cent and Thailand's lost 3.46 per cent.

The catalyst for the collapse was Friday's news from the US that employment grew at a much faster rate than expected last month, making it unlikely that the US Federal Open Market Committee will lower interest rates when it meets on March 26.

The number of non-farm jobs in the US rose by 705,000, the biggest jump in more than 12 years.

This sent the Dow Jones plummeting 171.24 points, or 3.04 per cent, to 5,470.45 on Friday and had many market-watchers heading for cover ahead of the opening of the Hong Kong market.

The fall in the Hang Seng Index turned out to be worse than even the most pessimistic forecasts. The consensus had been for a 300 to 500 point fall.

Kent Rossiter, institutional sales manager at Sun Hung Kai Investment Services, said: 'The speed at which it happened surprised a lot of people.

'It appeared to be a lot of foreign selling brought on by news of the Dow and interest rates.' At one stage close to lunch the market was down more than 900 points amid a bout of panic from retail investors. It recovered slightly in the afternoon but this was not seen as an indication of what will happen today.

Most in the market had been looking for a correction following the rally which started in mid-December, but saw yesterday's as being too far, too fast.

John Lai, fund manager at Thornton Management (Asia), said: 'I think the selling has been an over-reaction. We have not really changed our house view that the stock market can still move towards the 13,000 mark at the end of the year.' Brokers said Hong Kong was an easy target because of its high liquidity and the fact that it has made some of the strongest gains of any stocks market over the last year.

Until the fall yesterday the market had gained 11.43 per cent since January 1. This has now been pared to a slender 3.28 per cent.

Hong Kong's predicament was made worse by the fallout from China's missile testing in the Taiwan Straits.

The rising tension between the two countries is giving many international investors an excuse to sell Hong Kong shares.

 Lennon Chan, executive director at Tai Fook Securities, said: 'The main worry for investors is the escalation of the conflict.' Brokers will be watching Wall Street very closely in the next few days for an indication of whether local shares will be able to rebound.

Eric Lowe, at Mansion House Securities, said: 'It's very hard to say how the market will move tomorrow. It's even harder to predict where it will go in a week's time.' 



Stocks suffer test fallout