Raised expectations of an early US rate rise send Hong Kong, Asian stocks tumbling

Hang Seng drops 3.36pc, sharpest fall since February, as traders fear the days of cheap money could be numbered

PUBLISHED : Monday, 12 September, 2016, 9:26am
UPDATED : Monday, 12 September, 2016, 7:34pm

Asian stock markets plunged sharply on Monday as concerns grew that central banks had approached the end of their monetary easing and amid talk the Federal Reserve might be serious about lifting US interest rates as early as next week.

Hong Kong’s monetary policy is tied to that of the US as the city pegs its currency to the greenback.

If the Fed decides to raise rates this month, banks in Hong Kong would likely have to raise their rates, including mortgage rates.

The Hang Seng Index plunged 809.1 points or 3.36 per cent to end at 23,290.6 after opening 504 points lower, retreating from its 12-month high and standing at the lowest level since September 2. Forty nine of its 50 constituents ended in the red.

The day’s fall was the biggest since February 11, surpassing the 2.9 per cent drop on June 24 after the Brexit vote.

The Shanghai Composite Index lost 1.85 per cent to 3,021.98 with CSI 300 falling 1.67 per cent to 3,262.6.

South Korean’s Kospi also dropped 2.28 per cent to 1,991.48. Japan’s Nikkei 225 lost 1.73 per cent to 16,672.92. Australia, Taiwan, Thailand and Philippines stocks all lost while markets including Indonesia, Malaysia and Singapore were closed for holidays.

The falls came after all three major US indexes posted their biggest drop on Friday since the Brexit vote.

“Investors sense that global central banks are shifting their stance from accommodative monetary policies. Previous consensus on a slow pace of rate rise from Federal Reserve looks unrealistic now,” said Hong Hao, managing director and chief strategist with Bocom International.

Investors sense that global central banks are shifting their stance from accommodative monetary policies. Previous consensus on a slow pace of rate rise from Federal Reserve looks unrealistic now
Hong Hao, managing director and chief strategist at Bocom International

He added the Hong Kong market had stepped into a correction period, and that long-term investors should not enter the market for the moment.

On Thursday, European Central Bank chief Mario Draghi disappointed the market by saying it planned to leave its interest rates unchanged, dampening hopes of fresh stimulus that down European stocks.

The ECB’s move was followed by Eric Rosengren, a voting member of the Fed’s policy-setting committee, who said on Friday night that further delays in tightening interest rates would elevate the risks of an overheating of the US economy.

“If we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate,” he said.

Market watchers are now turning their attention to a speech later on Monday by Fed governor Lael Brainard for more information on the likelihood of a rate rise. Brainard is seen as a leading opponent of rate increases.

Both Japan and the Fed are due to hold meetings on September 21 to decide their future monetary policies.

Linus Yip, chief strategist at First Shanghai Securities, said Hong Kong stocks felt the sharpest pain as the benchmark has been severely over-bought in past few weeks.

“Several positive factors, such as regulators’ approval on mainland insurers buying Hong Kong stocks through the Stock Connect schemes, have pushed up the benchmarks rapidly and they are all fully priced in,” Yip said.

“Technically the Hang Seng Index has entered a correction period and we see 22,700 as next critical level. But the volatility is unlikely to be as sharp as today’s,” Yip said.

Insurance, banking and property stocks dropped sharply on Monday.

China Construction Bank plunged 5.4 per cent to HK$5.77 and Bank of Communications lost 4.6 per cent to HK$5.96.

AAC Technologies Holdings, a component provider to the iPhone, was the worst performing blue chip with its shares tumbling 8.4 per cent to HK$79.3.

Herald van der Linde, HSBC’s head of equity strategy for Asia Pacific, said the slump in Asian equities came as investors prefer to hold government bonds for yield if interest rates are expected to rise because bonds are considered safer.

In recent months, investors have used stocks as a tool for yield through dividend payouts, but if interest rates rise, bond yields will rise too.

“The market is starting to worry that there is not much further to go with quantitative easing,” Linde said.

Italy’s 10-year bond yield increased 4 basis points to 1.29 per cent, while Germany’s climbed 3 basis points to 0.04 per cent. Portugal’s rose 6 points to 3.19 per cent and New Zealand’s surged 10 points to 2.42 per cent. US 10-year government bonds were up 1 point to 1.69 per cent.