Jake's View

Hong Kong shares surge – based on US hope and prayer rallies

Hang Seng Index moves in lockstep with S&P 500, but is the herd heading for slaughterhouse?

PUBLISHED : Sunday, 29 May, 2016, 4:43pm
UPDATED : Sunday, 29 May, 2016, 4:43pm

Hong Kong stocks yesterday enjoyed their biggest intraday gain for over a month, as investors took cues from the US stocks rally overnight.

Business, May 26

Took cues from? If this were an intellectual property business the Hang Seng Index would be facing a lawsuit right now for breach of copyright.

The charts tell you the story. The first one compares the Hang Seng with the Standard and Poors 500 index in the United States over the last year. This American equities benchmark enjoyed a seven-year stellar ride until the middle of last year, more than tripling in value. Since then it has gone up and down to nowhere.

And, as the chart shows, the Hang Seng has tracked those ups and downs slavishly, the longer term moves as well as the daily ones. The S&P 500 was up this much last week and the Hang Seng followed in lockstep.

Hong Kong stocks dip amid lowest turnover this year as Fed rate decision looms

About all you can really say of the difference between the two from looking at the scale values is that the Hang Seng never really went up as much as the S&P 500 on up days but went down more on down days.

This is because the Hang Seng was carrying a load that the S&P 500 does not carry, to wit a heavy weighting of mainland stocks that continue to sag because they had been pushed up too far in a speculative rally last year and because of a slowdown in the mainland economy.

The second chart shows you this picture by comparing the Hang Seng to the Shanghai Composite index. Once again they are both up and down at the same time but in this case it is the Shanghai market that is further down over time.

I don’t know quite what it means for the Shanghai Composite. But for both the Hang Seng and the S&P 500 it means that everyone is waiting to see whether the US Federal Reserve Board will raise interest rates another 25 basis points in June.

China looks for clues to US Fed’s intentions as punters eye rate rise in June

The most recent reading of the tea leaves says the Fed just might. It all depends on whether Fed boss Janet Yellen thinks enough jobs are being created in the US.

This in turn depends much more on the dubious accuracy of statistical seasonal adjustment techniques than on any job count and, while waiting for the statisticians to pronounce, investors all move the same way at the same time.

Which brings up Jake’s No 5 Rule of Investment – as in the cattle business, the herd is all headed one way only when it is headed to the slaughterhouse.

The much talked of 25 basis points means very little. Interest rates must rise by more like 400 basis points to re-establish normalcy in the financial markets and what might appear as a US recovery is so fragile that another 25 basis points may kill it off.

The fact is that the US stock market is much too aggressively priced at the moment for what are weak earnings and slowdowns in many key sectors. Share price surges here based on hope and prayer rallies in the US do not inspire me with any confidence.