Your correspondent has to admit it. His year-end forecast for the Hang Seng Index this year has gone off the rails.
As the first chart shows, the forecast made at Christmas was that the index would briefly continue to rise this year, then slide to a level of 12,000 by late summer and only begin rising again at the end of this year.
Buoyed by the last flush of i-stock fever, the market initially went a little higher for longer than the forecast but in late May the forecast was right on the button with the index under 14,000.
Two big worries drove it there aside from the chills that caught up with the 'new economy' in April. They were that US interest rates would continue rising, inevitably propelling our own rates up, and that property prices would continue falling, with a projected oversupply of public housing coming on the market.
Both of these worries have faded recently and this is what led the index to reverse course suddenly and go shooting up.
Take those interest rates first. As the second chart shows, short-term rates have fallen more in Hong Kong than they have in the US since mid-May but the real decline in the US that our rates are following has been more in long-term rates such as Treasury yields.
It isn't necessarily a good sign. It represents what is called an inverted yield curve, which means that long-term rates have declined below short-term rates. This is unusual and normally a good indicator that trouble is afoot in the US. But that trouble has not showed up yet. Recently released US figures such as employment growth suggest that the US economy is perhaps not as overheated as earlier thought.
