Hong Kong stocks are expected to be stuck in a range this week as investors digest the potential negative fallout from last week's sharp increase in money market rates and a 50 basis point rise in bank lending rates that takes effect today.
Lingering expectations of a yuan revaluation should give China-related stocks some support, however, and help limit the downside, analysts said, noting that index heavyweight China Mobile was likely to remain a favourite pick in that regard.
'Investors are moving out of interest-rate-sensitive stocks and into China shares and that is helping the market a bit,' said China Everbright head of research Frederick Tsang.
This is likely to remain the case despite last week's introduction of a strong-side ceiling to the Hong Kong dollar peg at $7.75, specifically aimed at curbing the inflow of funds betting on a yuan appreciation. Such inflows had kept short-term Hong Kong interest rates unduly low for more than a year.
The adjustment to the peg 'will probably remove 75 per cent of the speculative buying of Hong Kong dollars [in the forward market] as a proxy for a yuan revaluation, but it won't deter speculation on other assets such as equities or properties', argued James Malcolm, currency strategist with Deutsche Bank.
Property stocks did come under pressure last week, however, after agents suggested that the lending rate increases, which would feed directly into higher mortgage rates, could be a real dampener on demand for new homes.
'The property sector will be the focus [this week] and sales over the weekend will be telling,' said Philip Chan, head of research at Capital Securities. As property is a pillar of the local economy, a slowdown in the recent brisk housing sales could dent confidence in the market as a whole.
