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Nerves to drag index lower

THE Lunar New Year break will have done little to calm frayed nerves in Hong Kong as events overseas continued to unsettle global markets last week.

The traditional rally accompanying the first day of trading for the Chinese New Year would be conspicuous by its absence tomorrow, brokers said.

Worse-than-expected producer prices in the US pointing to rising inflation, and the collapse of trade talks between President Bill Clinton and Japanese Prime Minister Morihiro Hosokawa have set investors on edge, according to Barry Yates, former head of research at Vickers Ballas and now an independent stockbroker.

Hong Kong share prices in London fell 400 points on Friday on news that US producer prices - the price of goods leaving the factory gate and a key indicator of inflation pressures - jumped 0.4 per cent in January, the biggest rise for a year.

Although the reaction might have been a little overdone, investors remain highly sensitive to any news which could prompt the US Federal Reserve to tighten interest rates again following its 0.25 per cent increase to 3.25 per cent on February 4.

Borrowing costs have not yet risen in the territory in response to the Fed's move but senior bankers here meet on Friday to look at the issue.


Analysts said the Hang Seng Index could open as much as 300 points down but prices would find strong support around the 11,000 level as local bargain-hunters move in.

''There is going to be a lot of nervousness out there but it is not wise to read too much into the reaction in London. The market may go down in Hong Kong but I doubt whether it will be dramatic,'' Mr Yates said.

The Hang Seng closed last week at 11,454, a rally of 49 points on the day after a 740-point sell-off in the wake of the US interest rate move.

One piece of good news was comments reported yesterday from Guo Fengmin, the Joint Liaison Group's Chinese team leader, that China wanted to re-open talks on financing the new airport in the new year.


Talks have stalled over Britain's latest package on airport funding, which proposes pumping more than $60 billion into the Provisional Airport Authority and the MTRC.

A breakthrough on the airport talks will provide a strong impetus for local markets.