Instability abroad and dismal company results weigh heavy on shares

The stock market could struggle this week as overseas instability and negative sentiment towards mainland and Hong Kong shares plant investors on the sidelines.

Last week, the Hang Seng Index dropped 3.32 per cent to 9,190.2 points as results from Bank of East Asia and International Bank of Asia confirmed forecasts of a glum reporting season for last year's earnings.

Brokers said that rising Japanese bond yields and fears the United States had seen the last of its interest rate cuts would cap global gains.

Delta Asia Securities research manager Ricky Tam Siu-hing said a US technology stock sell-off could also put pressure on Hong Kong stocks.

'If the sell-off in technology stocks extends to US blue chips, then that would put some more pressure on Hong Kong,' he said.

The subdued response to the public offering of Shandong International Power Development and a disappointing start to the earnings season will discourage investors from taking new positions before the Lunar New Year.

'Generally we get a rally coming up to Lunar New Year, but with things going on in Japan and the US, it looks like we are not going to get it,' one broker said.

Dealers got little indication for this week's trend from London trading of Hong Kong shares on Friday. The Hang Seng London Reference Index finished just 1.6 points higher at 9,191.8.

On Wall Street, the Dow Jones Industrial average ended down 0.26 point at 9,304.24 points on Friday after data confirming that the US economy was still booming raised concerns that the Federal Reserve might increase rates.

Most Asian markets were weaker last week, led by Japan which fell 4.14 per cent as surging bond yields and a strengthening yen soured sentiment.

Brokers said the Hong Kong market could fall below the 9,000-point level after sliding through the 9,400 support level last week.

Mr Tam said: 'If the market can stay above 9,000 points, it could rebound to 9,300. But if it can't hold that level, it could fall quickly to 8,500.' Daily average volumes of short sales rose sharply last week, coinciding with growing open interest in the index futures market.

One futures trader said US hedge funds could be behind last week's sales of index futures.

On Friday, short sales totalled $455.33 million, while open interest in index futures on Thursday was 55,171 contracts.

Daily turnover remained subdued last week, peaking at just over $4 billion on Friday with trade dominated by arbitrage funds and day traders, brokers said.

Vickers Ballas head of research Andrew Fernow said he expected a period of consolidation, given the lack of good news both domestically and in foreign markets, coming on the end of last month's 'bear market rally'.

Legend is due to release its third-quarter results today and SmarTone Telecommunications is scheduled to announce interim results tomorrow.

KEY FIGURES Week's close: 9,190.2 (-316.7) Turnover (daily avg): $2.91 bln Vol (daily avg): 2.09 bln shares Week's high: 9,633.15 Week's low: 9,156.71 February futures: 9,100 (-350) March futures: 9,058 (-392)