Technology stocks were at the forefront of a tailspin in Hong Kong's market yesterday after corporate America dropped another bomb. The Hang Seng Index closed down 2.94 per cent at 12,606.45 points on a light turnover of HK$7.81 billion. 'Investors don't have faith in the market,' KGI Asia director Sunny Chan said. On Wall Street, a 2.64 per cent drop in the Nasdaq Composite Index on Monday was compounded by a shock warning from Cisco Systems. The networking giant downgraded its earnings for the third financial quarter as Cisco chief executive John Chambers said the current operating environment 'may be the fastest any industry our size has ever decelerated'. Hong Kong stocks fell across the board in response to the latest doom-laden news. Analysts had been expecting a more buoyant start to the week after the Hang Seng Index gained 4.86 per cent in the week leading to the long Easter weekend. 'Obviously the warning took the market by surprise but I don't think it's that inconsistent with the general views of a turnaround in the US,' said a fund manager who was looking to the second half of this year for a recovery. 'So a warning into the third quarter of this year is really not that unsurprising if you're linking it to the macro view,' he said. However, with more first-quarter reports from bellwethers such as Microsoft Corp and IBM expected this week, the fund manager said the market would 'probably still see some earnings downgrades from some of the larger companies which will mean markets will still be volatile in the short term'. Although the sell-off was broadly based, technology and telecommunications plays caught the brunt of the Cisco body-blow with mainland operator China Mobile falling 6.3 per cent to $34.20. Other telecommunications counters also felt the heat, with Pacific Century CyberWorks sliding 5.45 per cent to $2.60 and China Unicom dipping 4.52 per cent to $9.50. Smaller technology plays were not spared as semiconductor equipment maker ASM Pacific dived 8.95 per cent to $12.20 and QPL fell 10.76 per cent to $2.90. Both companies, which had benefited last week from a bullish report by Salomon Smith Barney, were hammered down after Morgan Stanley slashed Intel Corp's earnings per share forecast. Intel, the world's leading chip-maker, was expected to announce its second-quarter results yesterday. The smaller banks continued to outperform as investors grappled with the aftermath of last week's announcement that the DBS Group of Singapore would make an offer upwards of S$10 billion (about HK$43.1 billion) for Dao Heng Bank. Mergers speculation saw HKCB Bank soar 15.23 per cent to HK$3.025 on the back of rumours the bank was courting a number of suitors including Citic Ka Wah Bank. HKCB issued a denial. Rumours DBS would lower its offer price for Dao Heng after due diligence is completed saw Dao Heng fall 1.75 per cent to $56. China plays managed to outperform the market with the red chips closing 0.2 per cent lower and H shares rising 1.12 per cent. China Everbright Securities associate director Geoff Galbraith said the mainland had provided the 'bright spot of the day' as it announced first-quarter gross domestic product growth of 8.1 per cent, significantly higher than analyst estimates. 'Good GDP figures should flow through though,' he said. 'The H shares have had a good rally but I think it'll continue to be the main theme.' However, Mr Galbraith said Wall Street would remain 'the dominant factor and you can't go against it'. Sinopec, China's largest oil refiner, bucked the market trend as it rose 2.6 per cent to $1.18. Earlier in the day the company announced a 306 per cent jump in net profit for last year. Email David Wilder at Davidw@scmp.com .