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Fears of Fed rate rise weigh on HK, Asian stocks

Hong Kong and regional stocks slipped yesterday, spooked by losses in US markets where investors worried the Federal Reserve would raise interest rates in the face of a sharp increase in 10-year Treasury bond yields.

The Hang Seng Index declined for a third consecutive day, losing 291.01 points or 1.4 per cent to 20,509.15, the heaviest drop since April 19. All 39 blue chips closed lower, with interest-rate sensitive property and banking shares the hardest hit. The index lost 0.45 per cent on the week.

The H-share index declined 1.17 per cent to 10,828.64 points.

'Bond investors dumped their holdings in anticipation of higher rates later this year on mounting inflation,' said Patrick Yiu Ho-yin, an associate director at Cash Asset Management. 'But the Federal Reserve doesn't necessarily follow the market prediction on long-term interest rates, given that inflation in the United States remains tame and the flagging housing market may not be able to withstand a rate rise.'

The Dow Jones Industrial Average on Thursday fell 1.48 per cent, the most in three months, after bond yields jumped past 5.1 per cent from about 4.5 per cent. The benchmark index has gained about 8 per cent without a big correction since February's global market rout.

On the heels of US losses, Asian stocks tumbled yesterday, with heavy declines ranging from Taiwan's 0.65 per cent to Indonesia's 1.88 per cent. Japan's Nikkei-225 Index sank 1.52 per cent.

Mainland stocks bucked the global downside, with the Shanghai Composite Index gaining 0.57 per cent to 3,913.135 points but losing 2.19 per cent for the week. The Shenzhen Composite Index climbed 1.63 per cent to 1,145.223 points, although it lost 1.51 per cent over the past five days.

'I don't expect the Fed will raise the interest rate in the short term, given that the inflation is still tame at around 2 per cent,' said Auyeung Tat, a fund manager at Apex Capital Management. 'It's not a surprise that the market takes [the rise in bond yields] as an excuse to take profit on the strong rally over the past few months.'

Movements in Hong Kong's interest rates typically track the US as the local currency is linked to the US dollar. The Hong Kong Monetary Authority, the city's de facto central bank, raised its key rate 17 times in the two years to June last year, in tandem with the increases in the US.

'If the three-month [Hong Kong interbank offered rate] stays at 4.6 per cent in the third quarter, banks may raise their prime rates by 25 basis points,' George Leung, the chief economist at HSBC, told Reuters.

Raymond Or Ching-fai, the chief executive of Hang Seng Bank, said the pressure for banks to raise rates still existed. However, in the past two days the pressure has eased due to the short-term interbank rate falling below 4.5 per cent.

Peter Sullivan, the chairman of the Hong Kong Association of Banks, said the prime rate could remain stable through the year.

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