That old interest rate demon may be back to haunt the Hong Kong market this morning, after strong US employment data on Friday brought on a plunge in bond prices that pushed 30-year Treasury yields as high as 7.08 per cent before they closed at 7.03 per cent. However, in a surprising turnabout, the Dow Jones Industrial Average ended Friday higher, leaving Hong Kong stocks with a confusing set of signals to follow this week. In a sell-first, think-later reaction, stocks in the US followed bond prices to the depths early on Friday, losing 88 points within the first few minutes of trade before pushing back into positive territory before the closing bell. The Dow Jones Industrial Average ended the day up nearly 30 points, but too late to help Hong Kong stocks trading in London. The Hang Seng London Reference Index sank 222.45 points to 10,974.1 points. That late show of resilience in New York might temper potential losses in Hong Kong today, but higher bond yields and the potential for a July or August rise in key money market rates could limit any possible gains in Hong Kong during the week. Support for the Hang Seng Index had been pegged at 11,000, but as South China Securities managing director Howard Gorges said, this market has a way of ignoring support and resistance. That support level was broken in London on Friday, although it might hold in Hong Kong today. Now that the possibility of an interest rate rise cannot be ignored, 'we are back to marking time', Mr Gorges said, forecasting that stocks could be trapped in a range of 11,000 to 11,200. Friday's employment data raises fears of inflation in the US, which Federal Reserve chairman Alan Greenspan has threatened to fight at any cost. US President Bill Clinton gave the Fed a strong message in a speech on Friday, when he noted the lack of inflation in the economy and asked policy makers to hold interest rates steady. With inflation holding the key, the next focus of the markets will be tomorrow's US producer price index figures, followed by the consumer price index on Wednesday. Higher than expected price increases would convince traders of an imminent rate rise and that could make for some bumpy trading. Any encouraging news in the US-China trade dispute could give the market a boost this week, brokers said. The two sides have given themselves until July 17 to reach some agreement before sanctions are imposed. In recent sessions, Hong Kong has followed a worldwide movement into smaller more speculative companies and some brokers see that trend continuing. Weakness in blue chip Hongkong Telecom could continue to be a trouble spot on the Hang Seng Index. The stock has been volatile for weeks on talk of a placement by majority holder Cable and Wireless, although nothing has been announced.
