Focus returns to rising interest rates as speculators offload banking major after results announcement A sharp drop in HSBC following its full-year earnings release on Monday dragged the Hong Kong stock market lower yesterday and brokers warned of little upside in the short-term as investors continue to worry about rising interest rates. Reports of strong earnings growth from several mid-cap companies in the past couple of days failed to provide support. For the most part, investors took the good numbers as an excuse to take profits, a sure sign that the market was running out of steam, brokers said. Taking its cue from a 2.8 per cent drop in its London share price on Monday, HSBC fell $4 to an intraday low of $129.50, but recovered to finish the day 2.24 per cent lower at $130.50 after retail investors began to buy. 'The 2004 result was quite good and in line with expectations, but the market is worried that profit growth this year will not be as strong,' said Peter Lai Wing-leung, director of sales at DBS Vickers, noting that a lot of speculators who had bought the stock in the run-up to the earnings would have been keen to take profit on the fact. 'Still, I think the share price overreacted and there should be strong support at the $127.50 to $128 level.' First Shanghai Securities strategist Linus Yip was more optimistic, expecting the stock to hover near $130 as retail investors were likely to keep buying ahead of the bank going ex-dividend later this month. The short-selling was also likely to be limited ahead of that, he said, but he added that once the money was paid up the focus would return to interest rates and the potential damage they might do to consumer spending and mortgage demand both here and in the US. 'In the longer-term, the pressure will be greater,' he said. Some brokers noted hedge funds trying to push HSBC lower in Hong Kong yesterday, perhaps with the aim of doing some arbitrage against the index future. Such trading would be more difficult in London or the US, where HSBC did not move the benchmark as much as it did in Hong Kong, they said. HSBC alone accounted for 80 per cent of yesterday's drop in the Hang Seng Index. The index ended down 0.95 per cent, or 134.2 points, at 14,061.15, in line with its 10-day moving average. It fell to a low of 13,954.58 mid-morning, but quickly returned above 14,000. With property stocks having run out of steam after last week's land auction it was difficult to see the overall market moving much higher in the short-term, analysts said. Among the eight stocks that helped limit the losses in the Hang Seng Index yesterday were exporters Yue Yuen and Johnson Electric, which gained 1.33 per cent and 0.68 per cent respectively. Fashion retailer Esprit added another 0.45 per cent to $55.75 following its strong earnings report last week, while Cathay Pacific rose 0.34 per cent to $14.35 as oil prices slipped away from the $52 level. The stabilisation in the oil price also halted heavy buying of oil producers, with Sinopec falling 1.39 per cent to $3.525 and PetroChina ending unchanged at $4.925. One broker said some investors were switching from oil counters into steelmakers, pushing Angang New Steel 2.05 per cent higher to $4.975 and Maanshan Iron and Steel up 0.8 per cent to $3.125. The H-share index fell 0.28 per cent, or 14.3 points, to 5,138.08. Semiconductor Manufacturing International Corp was under pressure after Motorola sold 47 per cent of its stake in the company through a share placement. The offer was priced at the bottom of the range at $1.64 per share, allowing the US telecommunications equipment maker to raise $847.8 million. SMIC finished 3.55 per cent lower at $1.63 off a low of $1.59. 'The stock is weak partly because semiconductor stocks in the US are weak, but there are some concerns that some of the other strategic shareholders may also choose to sell out,' one broker said, noting Shanghai Industrial Holdings was one such potential seller.