Bulls are dreaming if they think the rate-rise cycle is over

A week after Hong Kong's stock market ignited on hopes of an imminent end to US interest-rate rises, it is time for a reality check.

In just six days of trading so far this year, the Hang Seng Index has risen 4.66 per cent, more than it gained in the whole of last year. The increase is a welcome new year windfall for investors, but even though the market outlook remains broadly positive, stock market bulls should be warned that such spectacular gains are not going to continue throughout the year.

The first thing to remember is that, despite the euphoria, interest rates have not actually stopped rising yet. In the minutes of last month's meeting, which were released on Tuesday last week in Washington, the US Federal Reserve's key monetary policy committee only said that: 'The number of additional firming steps required probably would not be large.'

A lot of eager investors took that to mean there will be just one more quarter of a percentage point increase on January 31, and that the Fed would then hold tight, leaving its benchmark short-term rate steady at 4.5 per cent.

Some equity bulls even suggested that, with inflationary pressure subdued and the US property market looking precarious, the Fed could even begin cutting interest rates again in the second half of the year to avert a real estate bust.

John Ryding, chief US economist at Wall Street investment house Bear Sterns, says they are guilty of wishful thinking. 'The death of inflation is a story that has been told too soon,' he argues.

Mr Ryding points to sky-high commodity prices and cites the Thai government's threats to imprison people for hoarding sugar as wholesale prices surge. 'That's a real example of inflation in a commodity,' he says.