Market volatility spikes as investors assess impact of Occupy Central
Hang Seng Index and the Hong Kong dollar hit multi-month lows as investors take cover
Local stocks and the Hong Kong dollar fell to their lowest levels in recent months and ratings agencies expressed concern for the city's long-term credit rating as the scale of the demonstrations and the controversial police response took investors by surprise.
"The timing of the escalation caught the business community a little off guard," said Mark Konyn, chief executive of Cathay Conning Asset Management. "Investors will be concerned if the protests become more violent or if the stand-off lasts for an extended period resulting in significant disruption of business."
The stock market closed down 1.9 per cent yesterday to 23,229.21 points, its lowest level in two-and-a-half months. Property and retail stocks were hardest hit over concerns that sustained protests would deter mainland visitors during the National Day holiday, traditionally a week-long shopping bonanza for the city's retailers.
The Hang Seng Volatility Index, a forward-looking predictor of volatility in the stock market, jumped 23.88 per cent and hit its highest level in six months, with no sign during trading hours of any compromise from either the government or protesters.
Investors might reassess Hong Kong's top-tier rating and attractiveness as a financial centre if protests were drawn out and the city's institutions and "one country, two systems" political model were undermined, said Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch Ratings.
He said investors were also wondering whether Hong Kong could "find its way towards having a government that commands the basic level of popular consent required" to implement economic policy.
Moody's analysts warned in a report published before the weekend demonstrations that "if the discord persists, diminished confidence could start to erode Hong Kong's standing as a global financial centre, which would be clearly credit negative".
"The Occupy Central protest will inevitably cause short-term fluctuation in the markets," said Charles Li Xiaojia, the chief executive of Hong Kong Exchanges and Clearing, the stock market's operator, as he showed up unexpectedly at a listing ceremony yesterday.
"We urge investors to trade calmly and rationally. The market has already conducted a series of preparations for the protest."
The Hong Kong Monetary Authority (HKMA) said it would keep the interbank market and the city's currency board mechanism operating as usual.
"The HKMA will also inject liquidity into the banking system as and when necessary under the established mechanism," it said in a statement, without saying whether there had been any need to provide such support.
The Hong Kong dollar dropped as much as 0.09 per cent to a six-month low of HK$7.7648 versus the greenback, the largest intraday loss since 2011, though it remains far from the 7.85 level that would trigger intervention.
"We consider the peg virtually unbreakable," Tim Condon, head of Asian research at ING, wrote in a note to clients.
But, he said the sharp move yesterday was "a warning that financial markets and the economy are vulnerable to political uncertainty".